8December 2022OPINIONIN MYOver the past few months when speaking with friends and family I've had one question that has repeatedly been asked of me. Should I sell out of everything and wait for the economy to get better before getting back into the market? It's a great question and not surprising as most of my friends and family aren't that familiar with market mechanics and how they behave from a historical standpoint. I've told them the same thing I always tell clients and that is to "stay the course". Today, I'd like to share some data to help visualize why I nearly always respond this way. We always begin with diversification. The split between stocks, bonds, and alternative asset classes will be the primary driver of returns over long periods of time. The ideal mix varies from person to person based on several factors. Once we determine the appropriate asset allocation, we typically do not like to make sweeping changes without some shift in goals or life situation. We go into investing understanding that stocks are more volatile than bonds, which are more volatile than cash. We also understand that stocks typically have higher returns than bonds, which typically have higher returns than cash. When we say "typically", what we really mean is over long periods of time. Stocks can fluctuate wildly over the short term. In the short term, stocks (and bonds to a lesser extent) are unpredictable and often have wild swings to both the upside and downside. The chart below shows an annual range for stock returns of -39% to +47%, going back to 1950. Bonds have a wide dispersion of 1-year returns as well, ranging from -8% to +43%, but note the range is tighter than stocks (with much more limited downside). As recently as March 2020 the stock market circuit breakers kicked in and trading was halted because the market had dropped more than 7% in one morning. This happened 3 times that month and saw daily declines of between -7% & -12%. For comparison, Q1 of this year was the worst quarter for bonds in around 40 years and it was down around 7% also. The point here is that a really bad day in stocks is normally like a really bad year in bonds. Bonds can (and do) fluctuate in value, but typically have a low correlation to equity markets. Meaning that in a normal environment when stocks go down, bonds typically do not. Over longer periods (10-20 years) they become much more predictable. I've attached a chart below to illustrate this. On average, over a 5-year period stocks typically return somewhere between -3% and 28%. This means there is a STAY THE COURSE ­ THE SUCCESS MANTRA TO YOUR INVESTMENT STRATEGY By Christopher Huntley, VP, Senior Portfolio Manager, Equity Strategist, Simmons BankChristopher Huntley
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