The teacher has graded our papers.
Following the initial steep decline in the first few days of 2022, global stock markets broadly approached, kissed, or screamed back through all-time highs yesterday. About 700 days later.
Discipline — amidst hair-raising inflation numbers, unprecedented bond market carnage, amidst wars and bank crises and the carnival barking of financial media and windbag doomsdayers — has set the curve.
An index representing a plain-vanilla, 60% stocks / 40% bonds...is up nearly 9% in six weeks.
A reasonable expected return each year for such a portfolio is more like 7%.
Meaning the return in the last six weeks is approximately 900% of the return you would expect in any given six-week period. As I wrote earlier this year:
Small hinges swing big doors. Prices are brutish, irreverent, and unsympathetic to investors putzing about on the sidelines.
Market-timers will often find themselves momentarily better off for having actively traded their portfolio based on illogical whims.
But at some point the music stops, and stocks never look back again.
On expectation, of course markets will cool off at some point. Nothing goes up forever. But no one knows when this rally will lose steam, and it is certainly possible, much like March 9, 2009, that we never turn back again.
Back then, though, March 9 was just a volatile Monday. Prices had steeply declined — some investors thought the world was ending and others licked their lips. But it wasn't noteworthy yet. It was only the unknown future unraveling that crowned March 9 as historic.
October 26, 2023, just six weeks ago, was just a Friday. But it may similarly turn out to be the Friday.
These inflection points immeasurably change lives, and the grade an investor receives determines the type of life their family can afford. There are no minor leagues for money.
It has to be that way.
If you take one thing away from markets reaching all-time highs again, let it be that the emotional and behavioral side of investing are as critical as technical expertise.
Many investors who missed out on this rally will feel the need to jump into the market right now due simply to FOMO and regret.
But there is a chance that Friday, October 26, 2023 doesn't go down in history books. The market may turn right back around and crash through the floor set that day. And those people who missed out recently, only now to buy back in after the market rally, may end up experiencing none of the upside and yet the full brunt of the pullback.
It has to be that way.
Investors cannot just be given free returns for owning risky assets. Those returns will always be earned, and only by implemening the right portfolio consistently — every single day, every single six-week period, every single year — do investors have the highest probability of achieving the long-term returns that risky assets have historically delivered.
The anxiety of investing any other way is crippling. If you've missed this rally, you know. I feel for you. Forgive yourself quickly and right ship. Nearly every investor has major regrets — make this your last. Whether on your own or with professional guidance, implement a strategy that you can stick with regardless of whether October 26, 2023 gets written into history books or not.
For those fortunate to have experienced the full breadth of this rally, you should be exploring potential rebalancing opportunities. Ultrashort-term, risk-free assets still guarantee 5%+. Your riskier assets have recently delivered outsized returns, and your desired balance between an appropriate mix of these two categories is possibly at an imbalance given recent moves.
For about 700 days, I have used careful language to describe the resiliency of markets. I have never promised a future recovery, only described its near inevitability at an unknown future time.
In encouraging investors to stay disciplined, I have offered this sentiment:
Every historical market downturn has recovered, except the one we are in. But there's no reason to think this time is special.
And it wasn't. And it has always been that way.