Resilient Markets
This year has been a very good one for stock investors; as of November 19th, the S&P 500 is up 24.56% year-to-date. The average return for the past three years has been 23.89%, and for the past five years has been 15.3%.
If you invested in an S&P 500 index fund 20 years ago and still held it, your investment would now have a long-term unrealized gain of nearly 750%. That 20-year period includes both the Great Recession and the COVID-19 crisis.
Over time, stock markets have shown remarkable resilience, recovering from downturns and continuing to create wealth. Even amid challenges like pandemics, inflation, and wars involving nuclear powers, market returns have remained robust. Keep in mind, you would have had to demonstrate resilience of your own; the market was down over 50% during the Great Recession.
Technological Advancements
Investing has become cheaper, faster, and more flexible for investors. Statista tells us that in 2003, there was $15 billion invested in just 123 ETFs in America. By the end of last year, that had grown to $8 trillion spread across some 3,243 different funds.
ETFs offer investors a combination of low cost, tax efficiency, broad diversification, a hat trick of benefits, and an example of democratization. In addition to access to a huge variety of strategies and indices, retail investors also have instantaneous access to a world of financial data. Long gone are the days of sources like stock guides and Value Line.
Financial firms have also democratized investment tools. Low-cost accounts at many firms now include powerful analytical tools and trading platforms. The do-it-yourselfer has never been so well equipped, and neither have their advisors. If you don’t work with an advisor, it might be wise to learn how an advisor can add real value to your portfolio.
Technology is likely to continue to make investing exciting as the growth in artificial intelligence, clean energy, and biotech holds the promise of rapid and significant growth. We can only wonder what great new innovations lie ahead.
Diversification Options
Not so many years ago, it was very expensive to invest in foreign stocks. A buy-and-sell transaction in the emerging markets could cost 4% or more just 25 years ago. Today, investors can easily and cheaply diversify globally, owning developed and emerging markets securities.
Beyond geographic diversification, investors can now easily access real estate, alternative investments, and even cryptocurrencies. Crowdfunding has made access to private equity possible for very modest amounts of money. Today, it’s possible to construct a portfolio that largely mirrors the allocations of large endowments and pension plans.
Diversification is the art of financial planning, and it’s an area where professional advice can do a lot of good. The widespread availability and low cost of professional plans are other things investors can be grateful for.
Transparency
Regulation and competition have made investing a more secure experience for American investors. The fiduciary standard now applies to all SEC-registered advisors, providing at least some assurance that their best interests come first.
Transparency also builds the bonds of trust between advisors and their clients, which can have positive outcomes when that trust leads to patience and discipline on the investor’s part. When you have trust in your financial plan and the motives of your advisor, you have a claim on that elusive promise of advisory: peace of mind.
If you don’t feel you have real transparency into your financial affairs, you may want to fix that. Analytical tools are available that will help you understand your costs, your tax efficiency, your diversification, and your risk exposures.
Smart Monetary and Fiscal Policies
Although inflation has hit many families very hard over the past several years, Fed policy has done an effective job of taming it. When inflation raged in the ‘70s, the fed funds rate got as high as 20%; in this cycle, it topped out at just 5.25%. Thirty-year fixed mortgages peaked in the 7% to 8% range this year; in 1981, they hit over 18.5%. So, while this has been a rough time for many, the Fed has done an effective and adroit job of managing our economy.
We may have to save our thanks for smart fiscal policy until next Thanksgiving, but there are hopeful signs that government spending may become much more efficient. Whatever our politics as individuals may be, we would all benefit from a balanced budget and more secure entitlement programs. Let’s give thanks that America has solved big problems before and may do so again.
While challenges will always be with us, and we’ll never run out of things to worry about, the tools and options available today make it easier than ever to build and protect wealth. By focusing on long-term strategies and staying informed, investors can continue to navigate the ever-changing landscape with confidence.
