To say that the last few months of financial markets’ positive performance have been challenging would be an understatement. Going back to 2022, we saw both the equity (stocks) and bond (protected investments) markets have big losses for the year. Just as a reminder, the equity markets as represented by the Dow Jones Industrial, the S&P 500, and the NASDAQ saw losses in 2022 of -7%, -19%, and -32% respectively. The Bond markets did not do much better. Long-term U.S. Treasuries with maturities of 10 years to 30 years saw a decline last year of minus 29.3%. Intermediate term U.S. Treasuries did a little bit better, but still saw a loss of minus 10.6%. Any way you slice it, 2022 was not a good year for the financial markets.
Although 2023 started off slow, then had a better performance leading into the halfway mark; now the financial markets are starting to experience some headwinds limiting its performance for the year. Some of the headwinds impacting the financial markets performances are ongoing interest rate increases by the U.S. Federal Reserves as it tries to bring down inflation. While we all can appreciate lower costs for goods and services, the process of getting there by raising and maintaining higher interest rates for an extended period is often painful. Other economic headwinds include restarting student loan payments. It is estimated that 45.3 million student borrowers owe payments on their federal student loans. That’s about 13% of the overall U.S. population. This is significant because money going towards student loan repayment cannot be used for other discretionary purchases like housing, cars, and starting a business. The other headwind is the slow growth in salaries and wages. This is also limiting investing and making major purchases, and instead consumers must focus on paying for necessities.
Through it all, you must remember that when you have difficult financial times, you must stay focused on your goals to achieve long-term financial success. If your goals are shorter-term, then you should not select aggressive investments for your portfolio. Your portfolio should match the time horizon of your goals. Shorter-term goals should have less aggressive investments. This might limit your upside growth potential; however, the shorter-term goal is more focused on investment preservation and limiting the downside potential losses. However, for longer-term goals, the financial markets historically have paid off big. To reap this benefit, it is important to ignore the day-to-day market changes and instead stay focused on your long-term objectives. Please look at the following table from Fidelity to see how staying out of the equity markets on some of the best performing days has a big impact on your investment return.
As illustrated with Table 1 above showing the market performance over the last 42 years, missing the 5 best days would reduce your portfolio performance by -38%. If you missed the best 50 days, it would reduce your portfolio performance by a whopping -93%. Now that’s a big hit to your portfolio. Hypothetically instead of having $1.09 million you would only have $77,920 dollars. You can avoid this terrible outcome by staying invested in the equity markets and focusing on your long-term objectives. Staying invested in the equity markets may provide greater gains than moving in and out of the markets when reacting to short-term economic or business conditions.
Although this is for illustration, remember that investing involves risk and possible loss of your investment. Please only invest consistent with your risk tolerance. Consult with a financial advisor to improve your understanding of investment risks. Paycheck to Wealth can provide investment guidance and education to help you along the wealth-building journey.