The Market Doesn’t Stop to Reminisce
The true art of memory is the art of attention.
Everyday our brains are bombarded by an immense amount of information that teaches us about ourselves and the world around us. The first time we touched an open flame, we quickly found out that it wasn’t such a good idea. How do people learn from incidents like that moving forward? And what about everything else we've learnt, felt, and experienced? Our learning ability relies on reflection and on our memories.
It is a good thing then that the publicly traded stock and bond markets that you invest in do not have memories. They don’t remember what happened last week, last year, or even an hour ago. Prices keep changing based on what’s happening right now and what investors think could happen in the future. As you kickstart this new year, take a lesson from the market. Don’t be bogged down by what happened last year and instead, look ahead.
Prices Are Constantly Moving
The prices in markets move in anticipation of the latest news and what could happen months into the future, but how are these prices set? Buyers and sellers participating in investment markets negotiate prices for every stock and bond. To agree, they have to find a price that they both think is a good deal. This happens over and over, millions of times a day.
For example, the chart below shows the traded price of the S&P 500 ETF on the day of Fed Chairman’s press conference (1 Feb 2023). On that day, he was expected to announce a rate hike and also provide insights as to what the Fed could do for the upcoming months. You can see that the prices of stocks moved almost instantaneously to what he was saying about the US economy. Did stock prices remember the Russo-Ukraine war or the high inflation last year? No — prices adjusted according to what the expectations are for this year and beyond.
Markets are smarter and faster than you and me. While you’ve been reading this, markets have probably factored in thousands of pieces of new information and adjusted the prices of thousands of different company securities. Every piece of available information feeds into the decision-making process so everyone involved can agree on the price for a particular security at a particular moment.
So don’t be bogged down by what happened in 2022. It was not a great year for both stocks and bonds. But that period is now past and market prices are adjusting to what can happen in 2023 and beyond. In Jan alone, stock and bond markets have rebounded well — looking past its weak December performance.
2023 — A Good Start
The chart above shows the performance of two of the core equity funds that our VaR and Everest portfolios allocate to. It has already been a good start to the year and if historical investing cycles and market momentum indicators are any guide, the current strength and recovery in markets is likely to continue.
So don’t sit on the sidelines if you are worried that 2023 could be a continuation of last year. One of the worst things investors could do is impose their memory on their view of markets. Because then they might see patterns that just aren’t there and make choices that are not based on research or evidence.
If you have an investment plan that caters for your long-term goals and accounts for most of the worst-case scenarios, you are on the right path. It can feel daunting to develop an investment plan you can stick with and tedious to determine the level of risk that’s right for you. But few things are as important as how you invest your life savings.
That’s why most people would probably benefit from a fiduciary advisor to help them figure it out, especially during uncertain and turbulent times. If you are still worried about markets, your investments, or simply want to know more about how to construct a robust investment plan, come and speak with us.
