By: Reed C. Fraasa, CFP®, AIF®, RLP®
As we head into the new year, when it comes to financial markets, some people may expect more of the same as in 2022—essentially overweighting recent events compared to historical events. This is a behavioral issue known as recency bias and may cause people to make bad decisions with their money.
Looking back on the past three years, we have experienced wide swings in the markets associated with some very notable news stories. In case you have (understandably) blocked out the events of the last three years, we’ve seen a global pandemic, a war in Ukraine, a contentious US presidential election, at least one economic recession, and historically high inflation, to name a few. If you knew all this at the start of 2020, you would be forgiven for divesting from equity markets.
Global events affect markets in ways that can be enlivening or disappointing. Investors experienced the latter in 2022 when investment discipline was tested. But it can help to step back, with investing as with life, and look at the bigger picture.
From 2020 to 2022, the US stock market had a cumulative gain of 22.7%.* To earn that return, investors had to stick to their long-term plan through plenty of difficulties—not just the scarcity of toilet paper. Three months into 2020, the early days of the pandemic, US stocks were down by more than 20% for the year. Returns were also negative in September and October. Even 2021, when US stocks ultimately gained more than 25%, started with a -0.4% return in January. Those two strong-performing years were no easy ride. But they were critical in helping investors get through 2022 and be positioned to show a gain for the entire period.
When I mention this recent history to people, they are surprised because they feel like they lost money during the whole period. This belief can carry over to making decisions for the next year that could result in a missed opportunity.
Regarding your life and money decisions, never plan your future looking in the rearview mirror. Every year has its own story and circumstances.
Keeping the big picture in view and staying focused on long-term plans can help in many parts of life. While there’s never a guaranteed period when an equity investment will have gains, focusing on the long term can improve the chances for a positive investment outcome. The long-range view can benefit an investment portfolio and an investor’s quality of life.
*Based on the Russell 3000 Index
The foregoing content reflects the opinions of Highland Financial Advisors, LLC, and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct.
Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.
Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful or that markets will act as they have in the past.
Reed C. Fraasa is a CERTIFIED FINANCIAL PLANNER™ and founder of HIGHLAND Financial Advisors, a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, and investment management. Reed has 30 years of experience as a fiduciary advisor and is the author of The Person is the Plan®, a unique financial planning process. Reed was a frequent guest contributor on PBS Nightly Business Report and has been featured in the New York Times, Wall Street Journal, and Star Ledger newspapers.