The article below is shared from a recent Dimensional Funds newsletter on December 19th responding to the above question. We found it particularly insightful when thinking about long-term market expectations. As we approach the end of another trip around the sun, this seems like an opportune time to reflect on the past year as it relates to our investment journeys. Noteworthy events and outcomes of 2022 serve as key reminders that investing can be an endeavor riddled with uncertainty. And while uncharted territory may test our investment fortitude in the heat of the moment, its important to have a set of principles to refer to in these uncomfortable times. So what are some lessons we learn (or were reminded of) in 2022?
Don’t let the “Crisis of the Day” derail your plan. Just as the world started to feel some reprieve from a global pandemic, a war emerged between Ukraine and Russia, which sent another jolt of volatility into the market. This is just a recent example of the risks investors face in the unpredictable world we live in. But its important to recognize that the market has seen many crises before and will likely see more in the future. Despite this, disciplined investors have been rewarded in the long-term as highlighted in Lessons for the Next Crisis.
Bonds do have risk! 2022 has been one of the worst years on record for fixed income markets, with the Bloomberg US Aggregate Index down by more than 11%1. Surely many clients have asked questions like “how can bonds be down this much, aren’t they less risky?” Fixed income can play several different roles in an investor’s portfolio. Different fixed income asset classes carry different risks (some more than others), and as a result can behave quite differently. It is important for investors to match fixed income allocations with investment goals. Rising Rates: Short-Term Pain for Long Term Gain offers a silver lining to a year many fixed income investors might otherwise prefer to forget.
There are (still) benefits to Global Diversification. Headlines such as the Ukraine/Russia war, COVID policies in China, and a strong U.S. dollar (to name a few) contributed to relative outperformance in US equity markets compared with Develop ex US and Emerging equity markets for much of 2022. Year-to-date performance as of the end of September revealed that the Russell 3000 Index had returned -24.62% compared to the MSCI World ex USA Index which returned -26.23% and MSCI Emerging Markets Index which returned -27.16%. As a result, investors may have asked questions like “why am I invested in international and emerging markets with everything going on outside the US?” We have already seen the tides turn a bit in Q4. Year-to-date performance as of the end of November reveals the Russell 3000 Index has returned -14.18% compared to -13.87% by the MSCI World ex USA Index and -18.95% by the MSCI Emerging Markets Index. While we can’t predict what will happen going forward, evidence from the last few decades, as shown in Exhibit 1 below, illustrates the importance of being globally diversified.
Markets incorporate investor expectations. Whether it’s the next interest rate announcement from the Fed, the possibility of a recession, or the results of an election, markets incorporate expectations of investors into prices. Trying to time markets is a lofty endeavor and incorrectly timing markets can have costly consequences.
2022 has been a challenging year for many investors, but it also offers some key reminders. There are certain aspects of an investment journey that can’t be controlled such as what the market will do next. However, there are aspects that can be controlled such as developing a plan that meets goals and risk tolerances, staying disciplined, and avoiding investment decisions based on emotion. An investment approach built on sound evidence-based principles with a long-term focus can improve the likelihood of a positive investment outcome and ultimately improve the overall investment experience. Exhibit 1: A Decade of Difference January 1, 2002 – December 31, 2021, annualized returns
Past performance is no guarantee of future results. Actual investment returns may be lower. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. In USD. US Market is represented by the Russell 3000 Index, Developed ex-US Markets represented by the MSCI World ex USA IMI Index (net div.), and Emerging Markets represented by the MSCI Emerging Markets IMI Index (net div.). MSCI index returns are net dividend. MSCI data © MSCI 2022, all rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. All rights reserved. Source: Dimensional Fund Advisors newsletter dated December 19th, 2022
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