One of the weaknesses of human nature is our tendency to focus on what is most recent in our memories. Our minds are naturally influenced by things that have just happened, and this can impact the way we make decisions. In investing, this can be amplified. The market pendulum can sometimes swing from one extreme to the other, with prices often overshooting underlying “fair values” in both directions during the course of a cycle. As renowned investor Benjamin Graham once said, “In the short run, the market is a voting machine. But in the long run, it is a weighing machine.”
The year that has passed was no exception. Financial markets were largely challenged by the aggressive actions of the central banks as they raised rates to combat high inflation. As a result, there was a significant reversal from the excessive exuberance that characterized 2021. While it’s never easy to see asset prices under pressure, it has led to a more healthy outlook for how risk assets are viewed and, perhaps, more thoughtful consideration of how capital is deployed.
Yet, many of the same issues we faced in 2022 persist, including geopolitical tensions, lingering inflation, higher interest rates and continuing central bank tightening policies intended to slow economies and rein in inflation. While these are important issues not to be trivialized, we shouldn’t allow them to obstruct our view as we look forward.
This is because the investing journey can be lengthy — depending on our objectives, sometimes as long as our lifetimes. For most investors, investing involves building wealth for down the road, and not tomorrow. We can often forget that short-term performance may have little impact on longer-term results.
Veteran investors recognize that market downturns are a normal part of the cycle and allow for them, often using them to build investment positions for the future. Despite the volatility of 2022, it is instructive that Warren Buffett continued on his buying spree, adding a record amount of purchases to his portfolio throughout the year. He knows that interruptions will occur from time to time and uses these periods to seek opportunity, strong in his conviction that better days lie ahead.
Likewise, we can all benefit by looking forward, continuing to position ourselves for the years to come. Indeed, the opportunity to build significant wealth remains within reach for both young and old investors alike. Worth a reminder: The “Rule of 72” is a simple way to estimate how many years it will take funds to double at various rates of return. By dividing 72 by an average rate of return of 5 percent, funds can double in around 14 years (72÷5=14.4). So, even if you’ve achieved the respected age of 70, chances are you can still live to see your funds double — and, twice still if you become a centenarian!
The road ahead may be a long one, so don’t lose sight of the importance of planning for the future. After a challenging year, we would like to express our gratitude for your continued confidence in our services. May 2023 bring brighter days and better markets. Continue to look forward, not back.