As we enter into another holiday season, I can’t help but reflect on the many changes, both good and bad, that we’ve all experienced over the past 11 months. From an investing perspective, it’s been an interesting ride, and fortunately for all of us, the economy continues to chug along even as the sometimes market-moving headlines surprise, delight or disgust us.
We entered 2019 just after U.S. indexes closed with the worst yearly losses since 2008. But as 2019 began, U.S. job and wage growth continued strong, even as other countries started the year with slowing economic growth. Brexit failed, again and again. Theresa May resigned and Boris Johnson took over the Brexit mantle. The Fed held steady, then lowered interest rates. The trade war with China intensified, mellowed, and then intensified again. The yield curve — that indicator of government-bond performance — inverted in August, bringing renewed fears that a recession could follow. And then, things calmed down again. The Dow reached 28,000 for the first time on Nov. 15, and Americans gained confidence heading into the biggest spending season of the year. And last week, we started impeachment hearings.
Investors had many opportunities to get spooked this year, but fortunately, we have evidence demonstrating that a broadly diversified portfolio and a focus on known drivers of higher expected returns helps increase our odds of long-term success. A September 2019 report from Dimensional Fund Advisors shows that over the last two decades, those who stuck with their investment strategies during good times and bad ultimately reaped positive rewards for their patience.
Behavioral economics, a discipline that combines psychology and economics to understand why rational people sometimes make irrational decisions, helps to explain what’s really going on when negative headlines drive people in or out of the markets. Related to this concept is the idea of resilience — defined as the capacity to recover quickly from difficulties. Resilience is like having a mental reservoir of strength and toughness that enables us to turn life’s proverbial “lemons” into lemonade. It’s also a skill that can be developed, according to Neil Pasricha, author of the new book, “You are Awesome.”
Pasricha tells the story of a farmer with one horse. When the horse runs away, the farmer’s neighbors console him by saying, “I’m so sorry. This is such bad news. You must be so upset.” The farmer’s response? “We’ll see.” Later, the farmer’s horse comes back with a pack of 20 wild horses in tow. The neighbors congratulate the farmer, saying, “You must be so happy.” He says, “We’ll see.” The farmer continues to encounter a series of life’s ups and downs, but each time, his answer to concerned neighbors remains: “We’ll see.” And as Pasricha notes, “…the farmer has come to understand that every skyrocketing pleasure or stomach-churning defeat defines not who he is, but simply where he is.”
The farmer’s story could be any of us on our journey to financial well-being. Throughout the year, the markets climb and fall, but our resilience helps us stay focused our investment strategies. What will the coming year bring? We’ll see. But stick with it. And in the meantime, all of us at AMDG Financial wish you a happy Thanksgiving and holiday season.