You Have Every Right To Be Afraid...
Managing money right now is scary, but facts are your friends.
THIS REALLY HURTS
The stock market is down over 25% YTD, the bond market is down more than 15% YTD, inflation is near 40-year highs, buying a home is far more expensive than just a few short years (or even months) ago, and the Federal Reserve seems bound-and-determined to push us into a full-scale recession. I am not a pessimist, but I think that we can all agree that this does not add up to the most comfortable time to be a consumer or investor. This is especially concerning when considering that we are just over 2 years removed from the shutting down of our economy, a stock market crash, mass unemployment, and a self-induced recession. All this to say, if you are scared about where your investments are going from here, whether you can afford to buy a home now, or, simply, if you will be able to afford groceries this month, I give you every right to be.
FEAR IS A LIAR
“Be fearful when others are greedy and greedy when others are fearful.” -Warren Buffett
Fear is powerful. Fear can lead you to overthinking and overreacting. I recall, not long ago, enduring crippling fear at the thought of defending my own doctoral dissertation. I knew I had put the requisite work in, I knew that everyone was on my side, yet I felt alone, helpless, and like I would let everyone down if I failed. These feelings of fear were not truth, and the facts did not change with my level of fear. Often, facts can be the antidote to our fears. What’s more, we tend to act on our fears at the exact moment when facts are about to ring true. THIS is what I am here to bring you and your financial life: Facts in the midst of fears. Even in the middle of the hurt and difficulty of your current financial issues, there are facts that will make you feel far better about where you are and where you are going, financially.
FINANCIAL FACT #1: The Stock Market WILL Go Higher!
Ben Carlson's recent post on being long-term bullish in the stock market illustrated that in all but 1 of the 8 instances where the stock market (S&P 500) was down 25% or more, since 1950, the stock market was higher one year later with the average return one year from the market bottom being +21.6%. This does not negate the fact that the market is killing your invested savings right now, but it does show that much of what is being surrendered now will be recouped in the coming year(s). On top of this, since 1972, annual S&P 500 returns have been:
+20% or more: 19 years
Between +10% and +20%: 13 years
Between 0% and +10%: 9 years
Between -10% and 0%: 4 years
Between -10% and -20%: 2 years
-20% or less: 3 years
If this indicates anything, it is that the vast majority of stock market years (82%), over the last 50, have been positive and only 6% of those years have ended with returns as bad as this year’s. Therefore, stocks WILL rebound. When? I can’t tell you exactly, but history suggests that the pain won’t last. Additionally, if you are a true long-term investor, this will end up being but a blip on the radar of your investment returns that provides a HUGE stock market buying opportunity to boost your long-term returns. As stocks go down, long-term expected returns go up!
FINANCIAL FACT #2: Inflation WILL Slow Down!
If there is one common financial concern right now among all investors and consumers, it is INFLATION. Honestly, I am tired of this word, but until it subsides, it will be in the middle of all financial conversations. This is the force that has turned your $100 basket of goods and services in October 2020 into a $114.04 basket of goods and services in October 2022. These types of price increases have been demoralizing for the individual buying chicken breasts at the grocery store, the person moving into a new apartment, and the person buying their first home across the country (this is me). Inflation has caused your grocery bill to skyrocket, the cost of renting to increase to astounding levels, and the price of $250,000 homes in 2019 to cost over $100k more today. As much as inflation hurts, the craziness will end soon enough.
I cannot tell you when high inflation will truly come to an end, but I can tell you that there are multiple catalysts on the side of inflation declining that cannot go unnoticed:
The Federal Reserve is determined to slow inflation by continuously raising interest rates.
This increases the cost of borrowing and slows economic growth.
The Federal Reserve’s balance sheet is shrinking.
This means that their support of financial markets with liquidity (cash) is waning.
U.S. consumer sentiment is down more than 16% from a year ago.
People don’t want to buy things the way they did before.
Housing Prices fell at a record-setting pace over the Summer.
Lower home prices will dominate core inflation, eventually.
Together, all of this points to a time in the near future when inflation is closer to the Fed’s long-term goal of 2% annually and when our economy can HOPEFULLY heal from these few years of wild swings in sentiment, uncertainty, and (most importantly) prices. Is this reduction in inflation going to happen next month, next year, or later? I don’t know. All I do know is that high inflation will negatively affect our economy in a lasting way if not tamped down by the country’s central bank. Fighting inflation to the death seems to be exactly what the Fed is on a crusade to do.
FINANCIAL FACT #3: Nothing Is New Under The Sun!
“What has been will be again, what has been done will be done again; there is nothing new under the sun.” -Ecclesiastes 1:9 (NIV)
I am only 27 years old, and I often fall into the trap of thinking that the first time that I see something happen in the world around me must be the first time it has EVER happened. This is, of course, untrue, yet we do this ALL THE TIME with our financial lives. Those of us who came of age just after the Great Financial Crisis and lived through the longest bull market in U.S. history are especially guilty of thinking that prosperity and a smooth ride up is how things should be. This is not the case. Our economy has experienced and survived far more than we can remember. I hear supposedly-educated financial pundits suggest that “it’s different this time” CONSTANTLY, and it makes me sick. Anyone who has spent time studying the history of financial markets can attest to the fact that history does not quite repeat itself, but it certainly rhymes, meaning that the same things happen in new ways and with new catalysts.
So, let us look in the financial situation surrounding us and remind ourselves that it’s all been done before. Has inflation ever been this high? YES (1940s, 1970s, & 1980s). Has the stock market ever been down this much in a calendar year? YES (2008). Have interest rates ever been this high? OF COURSE (as recently as 2007). Has the U.S. debt-to-GDP (Gross Domestic Product) ever been this high? No, but VERY close (1945-1947).
What’s my point? Well, we have seen bad financial conditions and situations before. Have we ever seen a confluence of the exact events that befall us currently? Maybe not, but this is always true until they occur, with good or bad outcomes (though we only focus on the bad in this way). I am as tired of the word “unprecedented” as one could ever be, but I assure you that nothing in financial markets today is so out of the realm of “normal” (whatever that means) that we cannot come through the other side into a more prosperous and positive time in financial history.
FINAL THOUGHTS
Living through financial turmoil is tough, and some of you are in much more dire situations than others. That said, relying on facts to fuel your actions and attitudes can give you a light at the end of the tunnel. There are, undoubtedly, negative facts to consider, but they tend to be short-term and short-sighted. The facts I have given you here are to boost your confidence in being/becoming financially successful, in the long-term. Economic conditions and your own financial life will not change overnight, but through thoughtful planning and execution, facts can lead you on your way out of financial fear and into financial freedom. So, be afraid about the direction of your financial life, due to things outside of your control, if you want. But remember, only facts will cure your fear, and the facts are optimistic about your financial future.