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No Rain, No Flowers – The Value of Staying Invested

I recently came across an article that after nearly 22 years, Apple will officially stop production on the iPod, a device that changed its industry. From the original version to the iPod mini, the shuffle, the nano, the touch – Apple changed the way we listen to music. But as we all know, a lot can change in a decade or two, not only in technology but in life in general.

As for the investment world, the past decade has been kind to the stock market. From 2012 to the end of 2021, the average return of the S&P 500 was just shy of 15% per year, compared to the 10% average annual returns dating back to 1926. This outperformance created an inflated return premium close to 5% in recent years, and many investors have felt the impact as well.

While the last decade has been a steady ride up, it has created a perceived mindset that these types of returns are expected. But as investors, we understand nothing stays the same forever.

If we look under the hood, there are other interesting observations. Over the same time period, US Large Cap Growth stocks such as Microsoft, Amazon, Tesla, have outperformed US Large Cap Value stocks, like Johnson & Johnson, Procter & Gamble, JP Morgan Chase, by just over 5% per year. Additionally, if you would have invested in commodities (oil, gas, precious metals) at the beginning of 2012, you’d actually have less money than you started with as of the end of 2021. On the flip side, the US aggregate bond index returned 3% per year dating back to 2012, with 2019 and 2020 yielding over 7% returns. With all of this unusual activity, it’s no wonder many investors have felt on edge in recent years.

But just like with a lot of things in life, it’s likely we will begin to see a reversion to the mean, a return to “normalcy”. When you’ve had a bad week, life tends to work itself out, and good fortune comes your way. When your city’s baseball team begins the year with just 3 wins and 22 losses, they eventually string together a few good days and double their win total in a matter of 4 games (it’s going to be a long year Cincinnati Reds fans).

But in the case of the stock market, the reversion to the mean may not be as enjoyable. And 2022 has been a great example of this with the stock market down close to 16% year to date. But as the saying goes, “no rain, no flowers”. To experience the good, we should expect some pain along the way. We most likely won’t have 5% above average annual returns forever and it’s inevitable that we will experience bumps in the road over the next decade. We believe investing is meant to be long-term, and having the right strategy based on your personal risk tolerance and financial goals is essential.

Now, this doesn’t mean you just have to sit back and do nothing. Patience is key to investing, but there are certain tactical moves that can help potentially reduce risk and increase alpha based on the current market environment. To begin the year, value stocks are outperforming growth stocks by well over 10%. Commodities are surging with inflation still present. With interest rates increasing, bonds are seeing some of their worst losses ever through the first 4 months of the year but may present opportunities moving forward as yields on fixed income investments increase. We are starting to see a reversion to the mean, at least in the short term. Time will tell if that continues. But one of the main lessons of the year so far is that– what worked over the past 10 years, may not necessarily work over the next 10 years.

Personally, I still have my iPod nano. Thanks to the iPhone, it’s just in a drawer gathering dust.

Written by John Stanovich, CFP®





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