For most investors, 2022 was not a good year. Seemingly, week after week, the stock market was down.1 And to make matters worse, we endured the worst bond market in about 50 years. Meanwhile, the value of people's portfolios was also being eroded by record inflation.
These conditions had many investors wondering if there was a safer place than the stock market to put their money. Sure enough, articles appeared in the financial media which listed investments that were sure to beat inflation.
So how good were these suggestions?
John Rekenthaler, director of research for Morningstar, took a look back at some of the advice being given in the throes of 2022 to see if it turned out to be good or bad. As an example, he analyzed an article from a mainstream financial news source that listed eight potential investments that were sure to act as a hedge against inflation.2
He concluded that two of them were too vague to assess: Exchange-traded funds and mutual funds. The other six, that could be gauged, were: Precious metals, commodities, stocks, real estate, treasury inflation-protected securities (TIPS), and cryptocurrencies.
His first observation was that stocks were an odd choice, since they had fallen for the first half of the year and were mainstream investments—ones that nervous investors would have been looking to flee. However, more than a year later, U.S. equities were the only asset of the six that outpaced inflation.
Rekenthaler writes that even though the recommendations in the article turned out to be completely wrong, he doesn't see it as bad journalism. The author's advice was simply a logically sound response to people's legitimate fears.
And that was the problem.
"Financial news does not usually err because journalists advance their own agendas," writes Rekenthaler. "The problem stems from giving investors what they want." They want to read about financial dangers and how to avoid them.
Academics can also play to this demand. Nobel laureate Paul Samuelson once quipped, "Economists have predicted nine of the past five recessions."
Despite people wanting advance warnings about financial downturns, delivering these loss-avoiding forecasts with consistent accuracy is nearly impossible. As an example, Rekenthaler cites the performance of tactical asset allocation funds, which he calls "woeful."
Conversely, who could have accurately predicted the favorable stock market performance from just last week? (November 13 through 17, 2023)
The answer for the investor who wants to minimize unnecessary losses and maximize peace of mind is to expect uncertainty in the financial markets. It's impossible to predict correctly what will happen to any asset category over any given time period. However, it is possible to prepare for this uncertainty through broad diversification.
Short-term advice can make for interesting reading. But, over the long-term, staying disciplined and diversified in global markets has consistently rewarded those who approach investing with an evidence-based plan that doesn't rely on lucky guesses.
Sources:
1. http://go.pardot.com/e/91522/utures-open-to-close-news-html/9453xy/2135284003/h/Nx7Ky2aNdXe2TrFYMVEE-ZDRfAyNeub1sLj2nqGp020
2. http://go.pardot.com/e/91522/advice-why-read-financial-news/9453y2/2135284003/h/Nx7Ky2aNdXe2TrFYMVEE-ZDRfAyNeub1sLj2nqGp020
Disclosure:
The views expressed herein are exclusively those of Efficient Advisors, LLC (‘EA’), and are not meant as investment advice and are subject to change. All charts and graphs are presented for informational and analytical purposes only. No chart or graph is intended to be used as a guide to investing. EA portfolios may contain specific securities that have been mentioned herein. EA makes no claim as to the suitability of these securities. Past performance is not a guarantee of future performance. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. All opinions expressed herein are subject to change without notice. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. You should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Investing in any security involves certain systematic risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any unsystematic risks associated with particular investment styles or strategies.