posted on July 26th 2022 in Financial Planning & Market Commentary with 0 Comments /

Once upon a time, everything was peaceful and all beings lived in harmony. Well, I don’t know when that moment occurred or if it ever will but it sure feels like recently, random acts that are detrimental to our quality of life are occurring more frequently both locally and globally. Of course, this can have a depressive effect on our outlook on life both emotionally and financially. But don’t let the natural conditions of life cloud your perspective and hold you back from a successful outcome.

How do we justify a positive outlook when it appears that chaos is reigning? Well if you think about the big picture (I’m talking big stuff like the universe, life, extinction events, etc.) chaos is really the norm. In fact, Chaos Theory is a well-known theory utilized when applying math to systems. Not only does it occur in natural systems including fluid flow, heartbeat irregularities, and weather, but also in artificial systems such as road traffic and the stock market. So it can be argued that chaos is the true norm and the interesting thing about chaos is that it creates opportunities. And that is how life has thrived, taking advantage of those opportunities that arise as the result of chaos. Is it good? Is it bad? I’ll leave that to some deep thinkers. In my book, it just…is

Recent “chaotic events” have caused a downturn in the markets; we’ll look at the magnitude of the downturn later. On that note, I thought it would be interesting to look at historical U.S. market downturns and the investment opportunities created following these events via the chart below.

Market declines or downturns are defined as periods in which the cumulative return from a peak is -10%, -20%, or -30% or lower. Returns are calculated for the 1-, 3-, and 5-year look-ahead periods beginning the day after the respective downturn thresholds of -10%, -20%, or -30% are exceeded. The bar chart shows the average returns for the 1-, 3-, and 5-year periods following the 10%, 20%, and 30% thresholds. For the 10% threshold, there are 29 observations for 1-year look-ahead, 28 observations for 3-year look-ahead, and 27 observations for 5-year look-ahead. For the 20% threshold, there are 15 observations for 1-year look-ahead, 14 observations for 3-year look-ahead, and 13 observations for 5-year look-ahead. For the 30% threshold, there are 7 observations for 1-year look-ahead, 6 observations for 3-year look-ahead, and 6 observations for 5-year look-ahead. Peak is a new all-time high prior to a downturn. Data provided by Fama/French and available at mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html. Fama/French Total US Market Research Index: 1926–present: Fama/French Total US Market Research Factor and One-Month US Treasury Bills. Source: Ken French website.

Given the current market conditions, I think it’s interesting to look at the “Return After 20% Market Decline” chart in the graphic above. From July 1 1926 through December 31 2021 the average cumulative return for the U.S. market was 22.2%, 41.1%, and 71.8% for 1 year, 3 years, and 5 years respectively, after a 20% market decline. These returns might be a surprise to you and were probably a surprise to many during those periods but that’s what I mean when I talk about opportunity in chaos. An investor who wants to go to cash during times of perceived chaos may miss out on much of this opportunity which can have a significant impact on future wealth and the success of your financial plan. Opportunities don’t just occur when things feel right. In fact, it might be said that more opportunities occur when chaos reigns.

So looking at history, those moments of relative calm (in financial terms, “low volatility”), are really not the norm. They occur briefly and not too often. Personal, social, and financial crises (chaos) is really the norm. As such, your mindset and plan should recognize this and be built with this knowledge in mind. And many investors, with a good plan, have not only been successful but have thrived within the chaos.

2022 Q2 Index Review Through June 30

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net dividends]), Emerging Markets (MSCI Emerging Markets Index [net dividends]), Global Real Estate (S&P Global REIT Index [net dividends]), US Bond Market (Bloomberg US Aggregate Bond Index), and Global Bond Market ex US (Bloomberg Global Aggregate ex-USD Bond Index [hedged to USD]). S&P data © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2022, all rights reserved. Bloomberg data provided by Bloomberg.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net dividends]), Emerging Markets (MSCI Emerging Markets Index [net dividends]), Global Real Estate (S&P Global REIT Index [net dividends]), US Bond Market (Bloomberg US Aggregate Bond Index), and Global Bond Market ex US (Bloomberg Global Aggregate ex-USD Bond Index [hedged to USD]). S&P data © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2022, all rights reserved. Bloomberg data provided by Bloomberg.


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