It’s a new year, and you know what that means: resolution time. Exercising more, eating healthier, losing weight and spending more time with family — these are among the most popular resolutions for 2024.
In the investing world, instead of resolutions we often hear forecasts. Some of the more popular prognostications include where the S&P 500 will end the year, how many times the Federal Reserve will hike or cut interest rates and whether the U.S. economy will fall into a recession.
All of these predictions garner a lot of attention, but investors would be wise to ignore them.
Why?
Because they’re rarely correct, as we learned once again in 2023.
Back in December 2022, Wall Street strategists were collectively predicting a 1% decline for the S&P 500, an unusually bearish outlook for a group that’s nearly always bullish.
What actually transpired?
A gain of 24%.
A year earlier, these same strategists forecasted a gain of 4% for the stock market in 2022. Did they get that one right?
Not exactly. The S&P 500 would decline 19% in its worst year since 2008.
Why is predicting what will happen in the next year so difficult?
Because markets are forward looking and driven by a multitude of factors — the most important of which is investor sentiment. This means even if you knew what was going to happen with one of those factors (let’s say the economy or earnings), you couldn’t say for sure what the reaction would be.
2020 was the perfect example of this. The U.S. economy contracted (Real GDP: -2.2%) and S&P 500 company earnings declined 33%, but stock prices surged higher with a gain of 16% in the S&P 500. No one would have predicted this confluence of events, which is precisely the point.
As the forecasts for 2024 pour in, it’s your job as an investor to ignore them. What should you focus on instead?
Here are four resolutions to consider not just for 2024 but for life.
1) Embrace Risk
Risk often has a negative connotation, but you can’t ignore the fact that without risk there would be no reward. That concept applies to many aspects of life — and most certainly to investing.
If you’re a long-term investor, some amount of risk/volatility needs to be embraced if you want to earn a return higher than cash.
After years like 2022, when stocks and bonds go down together, it’s tempting to shun all risk.
But in the long run, not taking enough risk can be the biggest risk of all, as your purchasing power will be eroded from the constant drumbeat of inflation. Embrace risk.
2) Play the Long Game
The media is obsessed with what’s happening today, but as a long-term investor, the day-to-day market movements are just noise and not the game you want to be playing. Your biggest asset is time, and learning to use that asset to your advantage will make all the difference.
The odds of having a positive return on any given trading day is barely higher than a coin flip, but as you extend your horizon, you can be more and more confident in achieving a positive outcome.
The big money in investing is made not in the short-term wiggles but in the big moves. The longer your holding period, the higher your prospective returns. Play the long game.
3) Diversify, Diversify, Diversify
If you could predict the future, you would of course pick only the best performing asset classes.
Over the last decade, that would have meant a portfolio concentrated only in U.S. large cap growth equities.
But because no one can predict the future, you probably didn’t own such a portfolio. And that’s ok, because real diversification means not everything in your portfolio will be “working” at the same time.
There’s a cycle to everything in the markets; nothing outperforms forever.
At the end of 2009, many were bemoaning the “lost decade” in which the S&P 500 Index declined 0.9% per year and the Russell 1000 Growth Index lost 4% per year. It may seem hard to believe, but back then investors were questioning whether large-cap U.S. growth stocks would ever regain their footing.
Will the next decade for investors look exactly like the last one?
Not likely. The leaders and laggards in markets are forever changing, and the best protection against our inability to predict them is to diversify, diversify, diversify.
4) Focus on What You Can Control
As a diversified investor, you have no ability to control the timing or magnitude of returns. Put simply: they’ll be what they’ll be.
What can you control?
Your habits and your behaviors.
On the habits side, that means simple things like living within your means, trying to save more when possible and following a regimented investment plan.
On the behavioral side, that means not succumbing to the two most destructive emotions: fear and greed. These two emotions drive us to sell low and buy high again and again. As a consequence, investor returns tend to trail fund returns by a sizable margin known as the “behavior gap.”
When markets are going down, fear can take over, inducing you to act (sell). If you can push back against that fear and hold on, you’ll earn the market return and come out ahead of most investors.
Focus on what you can control: your habits and your behaviors.
