Last Week was not a fun one in the Market

By January 25, 2022All

Last week was not a fun week to be invested in the stock market at all. The US market is in the middle of a 10%* correction, causing all of us investors to lose money. However, as much as it is not fun to have the market go down, it is normal.

During the last 10 years, the US stock market has had an annualized return of over 14%*. An excellent investment period. For that same time, the US bond market has had an annualized return of just over 2.8%**. The difference between those two numbers is the “risk premium” of being invested in the stock market versus the much safer bond market. If the stock market only went up, there would be no risk involved. No risk, no return. They always go hand in hand.

Even though investors have made a lot of money over the last 10 years, it has not been without weathering downturns. Over the past 10 years, the S&P 500 has fallen over 10% on 5 separate occasions, one fall was over 20% (Dec 2018), and another was over 30% (March 2020).***

Holding on through the downturns is why investors are rewarded over the long term. If the short-term corrections cause panic selling at a low, you lock in your losses rather than letting the market come back and work for you. It is essential to realize that the market rising and falling over time is a feature of how it works, not a bug in the system.

Now let’s turn to Schulz Wealth portfolios specifically: Corrections like this is why we spread out money between investment assets, as well as within asset classes. Comparing the long-term returns of the stock and bond market, you may ask, why not just invest in higher returning stocks? From a pure return view, that may make sense, however as advisors to our clients, we know there is much more to it than that.

The other investment assets we use, bonds and buffered funds, do not have the same return potential as stocks. We are good with this because they provide protection in times of market volatility. These investments are safer than pure stock market investments and offer a complete investment experience.

The protection provided by these investments is part of what helps us weather down markets. If markets are down for a prolonged period of time and money is needed, this is where we can pull money from and give the stocks a chance to rebound. Safer investments also help emotionally because they do not allow portfolios to move around as much as they would otherwise.

Since we still cannot predict the future, our client portfolios are constructed to remain durable enough to withstand the short-term market noise while staying in a position to rise with the markets. Maintaining an investment strategy through short-term corrections is what brings us long-term success as investors.

– Austin Smith, CFA ®

*All return numbers for US Stock market are for the Vanguard Total Stock Market Index
**All return numbers for US Bond market are for the Vanguard Total Bond Market Index
***All S&P Correction data was sourced from Google Finance