Is 2022 Market Déjà All Over Again?

A few pointers to help ensure you don’t endure a double-drubbing this time.

Stoicism amid market turmoil is tested hard when a tsunami of grim investment headlines and plunging stock prices hit the market.

It is Déjà vu All Over Again?

Let’s look at recent history. In 2008, the problem was

1. Credit risk fears,
2. Rising inflation and
3. Oil hitting $100 a barrel, along with collapsing home prices

This time the causes are different, but the current conditions are very similar, investors worried about

1. Credit risk fears,
2. Rising inflation and
3. Oil hitting $100+ a barrel, along with Russia’s aggression.

As we've all come to understand, history doesn't necessarily repeat itself, but it often rhymes. 

The effect remains the same: a double-digit drop in stock prices. Currently the S&P 500 is down over 12% and the technology heavy NASDAQ is down over 20% (official bear market territory).

Consider the mistake some investors made exiting markets in 2008-09. Or those exiting markets in March of 2020. Those investors selling locked in steep losses and often were too nervous to get back into markets as prices rebounded. The result: a double-drubbing. Here are some pointers to keep in mind in the current market turmoil.

Stocks Outperform Other Asset Classes
Even considering periods of steep decline. Investing in stocks means remaining disciplined through both good times and bad – and no formula exists for consistently timing markets to buy at the bottom and sell at the top. Investors who attempt such timing often get sub-par returns because they actually often end up doing the opposite: buying high and selling low.

As Warren Buffett has said, “Be greedy when others are fearful, and be fearful with others are greedy.”

Higher Historic Returns on Stocks Go Hand in Hand with Higher Volatility
Stock investors have been compensated historically for enduring higher volatility. Conversely, we expect a lower return from bonds in exchange for lower volatility. Pursuing higher long-term returns means accepting accompanying risk, period. Your portfolios should be based on your unique financial and personal circumstances. This conceptual purpose doesn’t change if stocks correct 10% or rise 10%. Yes, you should rebalance regularly. But don’t buy or sell in a panic. If fundamentals are little changed, lower prices make stocks more attractive, not less attractive.

Diversification Remains Key
Proper asset allocation is the one free lunch in the investment world. The magical effects of diversification – which help smooth returns over time – persist. During a massive selloff, stocks, bonds, commodities, real estate and other asset classes may all exhibit weakness, but this is a short-term phenomenon. Once we move beyond the urge to excessively sell in a panic, the benefits of diversification again become obvious.

Avoid Emotional Reactions
Your core portfolio needs to be sufficiently diversified (multiple assets classes with lower correlations) to give you the highest probability of achieving your goals for the reasons important to you. Stick to your core portfolio and look to rebalance so you remain on track long after you forget the scary headlines.
 
Peter Lynch, one of the most successful investors of all time said, “The key to making money in stocks is not to get scared out of them.”
 

-Paul R. Rossi, CFA


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