Past performance is not a predictor of future performance. No rational investor will dispute that truth because no one knows with certainty what will happen tomorrow. In the same breath, experienced investors will certify that investing is a forward-looking game. With meaning less obvious, yet just as important, what does forward-looking mean in the context of our portfolios and how we invest?
When we say that markets are forward-looking, we refer to the fact that stock market valuations reflect expected future earnings. The market reflects investor sentiment on what’s going to happen in the future, not a response to the past. Usually, by the time we read financial headlines, stock price changes have already occurred. Those who decide to jump back in on the success, typically miss out on superior returns.
Experience tells us that a diversified investment portfolio will grow in value over the long term. Whilst investments will fluctuate in shorter-term periods, investors can benefit from more reliable capital growth over longer-term periods. This becomes more evident if we cast our minds back to 2020.
During the Covid pandemic, the market experienced a dramatic downturn, losing 30% of its value within a few weeks. Many investors were quick to sell their investments. When the economy did recover, the market had already improved. Investors who left their investments in place, saw the market rise 60% from its lowest point. Those who exited the market and waited for a sign missed that recovery.
More recently, the US Share market had a less-than-ideal 2022, down 19.44%. This is the worst year for the S&P 500 since the Global Financial Crisis. While eye-watering for investors, this downturn comes following a 90% increase in the previous three years. As murky as the water seems, investors are still urged to ride out the storm for the same reason as mentioned above.
Wealth Adviser Michael Hayward paraphrases simply, “Whilst the 2022 calendar year was a difficult one for investors, the key principles of investing continue to remain true. Investors who have remained invested and disciplined throughout the difficulties of 2022, will no doubt be rewarded over the long term for their patience.”
Investing for the long term, remaining disciplined throughout market cycles including the negative years and ensuring your portfolio is diversified will help to reduce your risk for whatever comes next. A forward-looking approach in which you persevere can make all the difference when it comes to achieving your goals.