Learning Our Lessons—Over and Over AgainSubmitted by Bernhardt Wealth Management on February 25th, 2019
Often in the financial markets, it’s useful to pause and look back to see if we can gain some perspective. After all, it is commonly accepted wisdom that those who refuse to learn from history are doomed to repeat it, to paraphrase philosopher George Santayana. It is also true that, while “history doesn’t repeat itself, it often rhymes,” according to a saying typically attributed to Mark Twain.
As we look back at the final quarter of 2018, we recall some breathtaking—sometimes heart-stopping—swoops and dives in the major equity indexes. Overall, the broad S&P 500 index lost almost 14 percent in the closing months of 2018, wiping out most or all of the gains investors had enjoyed during the previous nine months of the year. Many investors feared—and some Wall Street mavens solemnly predicted—that the stock market downturn would continue into 2019 and might even be bad enough to negate the effects of a record bull market that had been running to the upside for more than nine years.
However, a slightly different perspective from that same time period revealed that the fundamentals underlying the economy were still basically sound; companies were not going out of business; scheduled dividends were being paid; overall economic trends were far from unfavorable; and, in general, the climate for actual businesses operating with sound principles was not nearly as dire as the market numbers, read in isolation, made things appear.
In fact, as this is written, the S&P 500 is up 11 percent in 2019, and up almost 19 percent from its low on Christmas Eve, 2018. Those who gave in to their anxiety and the dire predictions in the financial headlines and sold their holdings near the end of last year missed this major upside move and the profits it created.
What can we take away from this? Well, for one thing, we cannot say with certainty that the current rising trend in equities will continue for another quarter, another month, or even another week. The past performance of the indexes is simply no guarantee of the future. In fact, this is one area where we can justifiably question the wisdom of Mark Twain’s aphorism. But human behavior is quite a bit more predictable than the specific closing numbers on the stock exchanges, and this is where history can teach us profitable lessons. One of those lessons is that when we allow our emotions to drive investment decisions, we will usually be wrong. Similarly, when we listen to those who tell us that either disaster or unbounded good fortune await us in the next week, month, quarter, or even year, we can be pretty sure we’re taking bad advice.
Perhaps the most important lesson we can learn is to value the assistance of an advisor who puts clients’ interests first and who bases investment counsel on empirical, research-driven, scientifically tested principles. That kind of advice will focus on your specific long-term goals and needs rather than tomorrow’s headlines.