“Markets are designed to handle uncertainty.” - taken from page 18
We are in very uncertain times right now – times we haven’t seen since 2008 / 09. Markets handle new information in real-time as that information becomes available. Throughout the second half of Q2, markets have digested new information resulting in a negative response sending market prices lower because investors are reassessing expectations of the future.
And this is OK…this is normal!
Short-term market expectations can be positive (markets move up) and negative (markets move down), but long-term expectations have only one position (positive) and one direction (up)! If our retirement portfolios call for owning stocks this means multiple things: we are looking to build wealth and invest in instruments that historically beat inflation’s purchasing power eroding abilities*; and we understand short-term stock movements are wild and unpredictable, but long-term stock movements are far less wild and far more predictable.
*that’s a cumbersome statement. Explained better: inflation erodes our purchasing power. Per the definition, over time what a dollar can buy today will buy less of tomorrow. Historically, inflation is about 3% per year; if we have $100 today, one year from now we’ll still have $100, but its purchasing power would be about $97. This is bad! Cash is comfortable, but it just sitting around and losing 3% of its purchasing power every year is very bad, so we need to counteract that. And we do that by investing our extra – extra because we first want to have a properly-funded emergency account – into stocks and bonds. Stocks give us the best inflation beating returns, but they come with the most volatility, while bonds come with less volatility but the trade-off being their less, if any, inflation beating returns.