This has been a test: Developing a Financial Plan You Can Stick With
Think back to December 2019. The economy was humming. Unemployment, interest rates, and inflation were at historically low levels. But then what happened?
A global pandemic hit. By the end of March, the S&P 500 had dropped nearly 20% in value.
Later in the year, scientists announced that they’d developed a vaccine, and markets roared back.
FAANG stocks soared (that’s the publicly traded stocks of U.S. technology giants Facebook, Amazon, Apple, Netflix, and Google) … before giving up a lot of gains.
Meme stocks (those shares that have gained viral popularity due to heightened social media profiles) shot way up … and fell back down.
Bitcoin and other cryptocurrencies reached record highs … and then crashed.
Inflation spiked to the highest levels most of us have experienced for a very long time.
And Russia invaded Ukraine, sparking a humanitarian crisis and geopolitical uncertainty.
I don’t know anyone who predicted all of that back in December 2019. But what if someone had? What would you have done?
Next question
What if that person told you that, despite all that news, the Russell 3000 (a market-capitalisation-weighted equity index that seeks to track 3000 of the largest U.S.-traded stocks) would average a return of 10% a year over the next three years?
Would you have believed them?
Would you have stayed in the market?
Because that’s what happened. A yearly return of 10%! That’s pretty close to the stock market’s historical average over the past century.
The conclusion I hope you reach is that it’s unrealistic to think any investor can outguess markets. You’re probably better off expecting that markets do their job of capturing the human ingenuity taking place every day across thousands of publicly traded companies around the world.
Let the markets do their job?
What do I mean by markets doing their job? When news of the pandemic hit, markets adjusted and prices went down. In other words, when uncertainty peaked around March 2020, investors demanded a higher return to jump into the market. Then, when news of a vaccine spread, the market adjusted its expectations accordingly. In the short term, there are often wild swings up or down. Making a change during either can be dangerous.
The past three years were a good test of whether or not you had an investment plan that was sensible to stick with. So, take a moment to think about why you did what you did, and prepare for next time. Because the next three years may be just as uncertain.
First, with our help, make sure your investment plan is sensible and based on financial science (that’s a tick). Second, make sure it’s realistic for you and your own unique situation (that’s a second tick). Even the greatest plan is no good if you can't stick with it during tough times. Invest in markets in whatever asset mix is right for you.
The power of continual progress
I don’t make predictions, but I do believe in the power of human ingenuity to fix problems big and small, innovating the whole way. What remains constant throughout history is the power of people to make progress in the face of challenges.
We’ve seen it in the fight against the pandemic, where vaccines developed at lightning speed are now being administered around the world. We’ve seen it in the continued progress of gene therapy, which is revolutionising the treatment of multiple diseases. So, as we start 2023, let’s remember the lessons of the past three years. Let’s develop - and stick to - plans that take us through the short-term ups and downs of market fluctuations so we can capture the long-term benefits of human ingenuity.