The past few years have been eventful, and the 1st quarter of 2022 was not an exception. The Russian invasion of Ukraine, inflation, and supply chain issues dominated the headlines during the first quarter. There are a significant number of concerns in the world at the current time and it is easy to see these issues impacting the markets daily. The possible future implications have many people wondering if changes to their investment strategy would be prudent.
In our last correspondence from early January, we addressed questions regarding investment strategy while US stocks were at all-time highs. It feels like a different world today. Stocks ended the 1st quarter down 5.28%1, despite being down 13% in mid-March2. Things can change fast. Oddly enough, since 1980 US stocks have averaged an intra-year decline of 13% per year3. There current headwinds related to Russia and inflation that can remind us of the 1970’s, but if only looking at US stock returns, it makes 2022 appear unremarkably “average”.
Another interesting aspect of this “average” is that since 2012 the intra year declines have only been greater than 13% in 2017 and 2019. It does not feel like it, but the market has been less volatile than normal over the past 10 years. It may be that 2022 ends up more volatile than average, but we do not believe there is any way to know this with certainty. It is easy to look back at reasons for past market declines and subsequent recoveries, but as we have written, Hindsight is 20/20. Foresight Isn’t.
We firmly believe that successful long-term investors understand that Volatility is the Price of Admission. A decline in the market is not something to be avoid, but rather accept as part of a long-term investment strategy. The pain of enduring these market declines is what makes earning reasonable long-term returns possible.
The concerns we are facing today related to geopolitical risks, inflation, energy costs, and supply chain bottlenecks have been concerns in previous market cycles and we believe they will be overcome this time as they were in the past.
This approach does not mean that we do not take any actions during volatile markets. Market volatility often leads to tax loss harvesting opportunities in taxable accounts and can also lead to overall portfolio rebalancing. The specific action will vary based upon market conditions, tax consequences, account types and asset location optimization. If you ever have questions about your specific situation, please do not hesitate to reach out.
3Calamos Investments, Volatility Opportunity Guide
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.