Wow, what a year it’s been. A crisis is happening just about everywhere you look — the war in Ukraine, China’s aggressiveness, recession, inflation, out-of-control violent crime, political divisiveness. All those simultaneous events seem to have come out of nowhere. And as 2022 marches on, the stock market continues on a wild ride. After stellar returns from 2019 to 2021, U.S. stocks completed the worst first half in the past 50 years, with a loss of 21%. The financial media has been relentless with doomsday predictions, and it’s easy to find yourself worried about what the future might hold for your investments.

Data reported by Yahoo Finance on U.S. stocks’ first-half returns since 1950 showed a market that posts more positive returns than negative. Our point: Cycles are a normal and natural part of the stock market.

But why do we have market cycles? When the market is up, investors often feel confident and think nothing will ever go wrong again. Eventually, the contagious enthusiasm can lead to inflated market prices. Then, when the prices are well above fair value, the market corrects itself, and investors switch to a pessimist view that nothing can ever go right again. Ultimately, some investors buy at reduced prices, starting the cycle anew.

Investors who allow their emotions to guide their investment decisions often buy high and sell low, which is not the path to a successful financial plan. But emotions are part of market cycles and a reason we see volatility over and over.

The Case for Optimism

Since your outlook matters in your investing decisions, let’s change our perspective from the current pessimistic news. Instead, let’s reflect on the past as an exercise in planning better. Imagine it’s January 1997.

• The first Harry Potter book was just published.
• Amazon sells only books.

The internet is in its infancy. We’re still a year away from Nobel Prize-winning economist Paul Krugman saying, “By 2005 … the internet’s impact on the economy [will be] no greater than the fax machine’s.”

Now, let’s say you stumble upon a crystal ball. Yes, the crystal ball that every investor and market prognosticator dreams of having. First, you see the 25-year outlook:

• The Y2K scare.
• The bursting of the tech bubble.
• Russia’s debt default.
• 9/11.
• U.S. stocks returning 0% over the “lost decade.”
• The Great Recession.
• The 2008 housing crisis.
• Polarizing political movements.
• The global pandemic.
• The Ukraine war and the second Russian debt default.

You know what the future holds, but what do you do as an investor?

• Do you get into the market or out of it?
• Do you change your investment allocations?
• Do you increase or decrease your 401(k) or 403(b) contributions?

Be honest with yourself. With headlines like the ones above, the future looks bleak. But what actually happened over the next 25 years for investors?

From January 1997 to December 2021, the U.S. stock market averaged an annualized return of 9.8%. One dollar invested in January 1997 would be worth $10.25 at the end of 2021. But how could this be? Given all the negative events, how does an investor earn nearly a 10% annual return over 25 years?

It’s because uncertainty is priced into the market. That means uncertainty is part of the market. Without uncertainty, you really don’t have a stock market.

Markets always have been, and always will be, uncertain. If there were no risk, there would be no return. If you’re not willing to endure the discomfort of short-term volatility in your portfolio, you won’t be rewarded with above-average, long-term stock returns. It demands your patience.

For as much bad news we experienced over the past 25 years, an equal (if not greater) amount of good news occurred. People are innovative, and innovation is bred from hardship and uncertainty.

The innovation over the past 25 years has been staggering. Thousands of companies didn’t exist 25 years ago, so why would we give up hope, ignore the academic research and jeopardize our plans due to uncertainties? Uncertainties were always present and always will be. As will human innovation and ingenuity.

Have a Financial Plan

We choose to be optimistic about the future, but if optimism is a stretch for you now, at least meet us at pragmatism. Part of that is making sure your investment mix is appropriate for your financial goals. If you stay the course with the wrong portfolio, it will take you to a place you don’t want to go.

Your financial goals should dictate your portfolio allocation mix. We call these three time-based goal categories your “Three Bucket Strategy.” For instance:

• Choose low-risk money (cash or similarly stable instruments) for your short-term goals (zero to two years).
• For your midterm goals (years three to six), we recommend a balanced mix of stocks and bonds.
• Long-term funds are invested in a globally diversified portfolio of stocks for growth.

Additionally, your investment portfolio’s construction and ongoing oversight should be based on long-term academic research, not fads or trends. The “Three Bucket Strategy” stacks the odds in your favor, putting you in a position to:

• Weather the storm in the short run.
• Reap the rewards of patience in the long run.
• Help you accomplish your most important financial goals and achieve your heartfelt family dreams.

It’s no longer 1997, for worse and for better. We think David Booth, the executive chairman and co-founder of Dimensional Fund Advisors, said it best: “By investing in a market portfolio, you’re not trying to figure out which stocks are going to thrive and which aren’t going to be able to recover. You’re betting on human ingenuity to solve problems. … People, companies and markets adapt.”

When you’re a globally diversified investor, it is that adaptation, combined with patience, that allows you to expect favorable investment outcomes over the next 25 years and beyond.

When times feel most uncertain, we must remind ourselves not to panic. Instead, reach for optimism, rely on your financial life plan for making financial decisions, and think long term.

ANOTHER PERSPECTIVE

According to Oaktree Capital Management co-founder Howard S. Marks, “Investors are capable of interpreting virtually any piece of news either positively or negatively, depending on how it’s reported and on their mood.” His article “Bull Market Rhymes” is at bit.ly/3dEifL1.