If it feels like the voices in today’s news are louder than ever, with all sides shouting to be heard, you’re not imagining it. Turn on the television, open a news website, or scroll through social media and you’re likely to encounter a constant stream of commentary about what is going wrong in the world, and why now is the time to panic.
Market volatility, geopolitical conflict, political uncertainty, recession fears, each headline competes for attention and often for alarm. While Roehl & Yi cannot turn down the volume of the news cycle, we can offer a few reminders that may help investors tune out the noise and stay focused on what matters most: diversification and long-term investing.
Every day there seems to be another article or expert predicting disaster or insisting that “this time is different.” Yet, when we look back at market history, we see that markets have repeatedly weathered periods of extreme volatility caused by wars, financial crises, political upheaval, and global health events. Despite these shocks, markets have historically recovered and continued to move higher over time, rewarding investors who remain patient and disciplined.
The chart below shows the performance of the MSCI All Country World Index from 1987 to the present. As the chart illustrates, the world, and the markets, have experienced numerous disruptive events over the past several decades. During these periods volatility is common and often dramatic. But with time and patience, markets have historically recovered and resumed their long-term upward trend.
Even if we go further back and include events such as world wars, the pattern remains the same. While each moment in history may feel unprecedented, market volatility driven by geopolitical events is nothing new.
It is also important to remember that the experience of the S&P 500 is not necessarily the same as the experience of a diversified investor. Financial news tends to focus on major indexes such as the S&P 500 or the Dow Jones Industrial Average. However, many investors hold diversified portfolios that include a broader range of asset classes, such as fixed income, international equities, commodities, and other investments in addition to large U.S. companies.
Because of this diversification, the experience of an individual portfolio often looks quite different from the headline index numbers reported in the news. The highs and lows tend to be less dramatic, as varying asset classes respond differently to market events. Diversification does not eliminate volatility, but it can help smooth the ride for long-term investors. The chart below illustrates this dynamic and shows how diversified portfolios (the light grey squares) tend to experience less extreme fluctuations than a single stock index.
In short, what you hear on the news is often not fully representative of the experience of a well-constructed investment portfolio.
After periods of market volatility, it is not uncommon to hear someone say that they “lost everything” or something similar. However, when we examine the data more closely, these statements generally fall into one of three categories:
- They are exaggerations.
- The individual was not invested in a prudently diversified portfolio.
- The investor panicked and sold during a market decline and missed the recovery that followed.
The chart following shows the performance of the S&P 500 beginning in 1997 and highlights several major periods of volatility, including the dot-com bubble, the global financial crisis, and the COVID-19 pandemic. In each case, markets experienced sharp declines but ultimately recovered and moved higher over time. The same story continues to repeat itself: investors who stay invested are generally rewarded for their patience, as illustrated in the second chart below where a diversified portfolio (60% equities and 40% fixed income) delivered positive returns in 99% of the five-year periods and 100% of the ten-year periods.
When friends, family members, or commentators share dramatic stories about their market experiences, it is wise to take them with a grain of salt. Often these accounts reflect exaggeration or investment strategies that ignored the basic principles of diversification and long-term planning.
Another common concern in today’s environment is the perceived impact of politics on the markets. Political events can create short-term volatility, and opinions about them tend to be strong. However, historical data shows that markets have generally produced positive long-term returns regardless of which political party is in power.
In conclusion, feel free to panic over the state of the world, attend protests, plan your move to Canada, etc. but when it comes to your investments, panic is rarely a productive strategy.
A thoughtfully designed, diversified portfolio is built to navigate periods of uncertainty. At Roehl & Yi, our goal is to help clients construct portfolios tailored to their individual needs, goals, and risk tolerance—and to help them stay focused on the long term even when markets become turbulent. If you have any questions or concerns, please feel free to reach out to us at Roehl & Yi. We are happy to help and lend our experience and expertise.
This report is provided for informational purposes only. Nothing herein should be construed as the provision of personalized investment advice, nor should it be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change without prior notice. Third-party data sources contained herein are for illustrative purposes only and are believed to be reliable, but we take no responsibility as to their accuracy. The newsletter contains certain forward-looking statements that indicate future possibilities. Due to known and unknown risks, other uncertainties, and factors, actual results may differ materially. As such, there is no guarantee that any views and opinions expressed herein will come to pass. Investing involves risk of loss including loss of principal. Past investment performance is not a guarantee or predictor of future investment performance. Any reference to the performance of securities of markets, indexes or specific investments is for illustrative purposes only and does not represent any of R&Y’s recommendations or performance. Any reference to a market index is included for illustrative purposes only as it is not possible to directly invest in an index. The figures for each index reflect the reinvestment of dividends, as applicable, but do not reflect the deduction of any fees or expenses, or the deduction of an investment management fee, the incurrence of which would reduce returns. It should not be assumed that your account performance or the volatility of any securities held in your account will correspond directly to any comparative benchmark index. The information contained herein is based upon certain assumptions, theories and principles that do not completely or accurately reflect your specific circumstances. You should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice from R&Y or the professional advisors of your choosing.