What History Tells Us About the Future

Posted by John Charles Kernodle on November 23, 2022  /   Posted in Newsletter

The recent market drama reminds me of a quote often attributed to Mark Twain: “History doesn’t repeat itself, but it often rhymes.” We don’t know yet where annual market returns will end up in 2022. But the historical record can tell us a few things, even though we all know that past performance is no guarantee of future results.

First, since 1926, the markets have generated a positive return for investors 75% of the time. As shown in the chart below, we can see the distribution of positive to negative years. These results lead me to the second point.

Distribution of U.S. Market Returns

Warren Buffett often says, “It’s only when the tide goes out that you know who’s been swimming naked.” In other words, market downturns have a way of revealing the people who took on more risk than they can afford. However, your work with Strathmore has weighed what you can manage through the good and the bad. Your wise decisions during calmer times mean you’re well-positioned to handle the swings of the markets and keep your money invested because you know what comes next.

Third, we know from past market downturns that attempting to time the market upswing proves very difficult. It leads to a vicious cycle of selling low and buying high, a fast way to get off track from your long-term financial goals. I understand the frustration of watching the markets do what they do. But we both know investors who pulled out at the worst possible moment only to turn around and miss the rally in the coming months.

Finally, the market rewards us primarily from its inherent risk. If we remove the risk of a down market, we reduce the potential reward. In short, we end up with a more expensive version of a CD or money-market account that will struggle to keep up with inflation.

I know 2022 hasn’t been the year any of us hoped for from an investing standpoint. It’s essential to recognize that an effective financial plan assumes your portfolio will feel the effects of a downturn at some point, and we make plans accordingly. It might be hard to remember that given the success we’ve experienced in recent years. It may feel even more distant as we deal with other financial challenges, like supply chain issues and inflation. But it’s for these very moments that we built a disciplined financial plan–to get us through to the other side.

Our best to you and your family as we enter the holiday season. Don’t hesitate to reach out if you have questions or questions. Take care, and we’ll see you in 2023.


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