It’s no doubt been a painful year thus far for investors. After many years of spectacular gains and low interest rates, financial markets are now struggling to digest a deluge of new information—high inflation, ongoing supply chain disruptions, rising interest rates, Covid-induced lockdowns in China, and the war in Ukraine—to name only a few. Subsequently, markets have moved lower as they work to assess what it all means for the economy and the prices of everything from stocks and bonds to real estate and cryptocurrencies. This has certainly been a painful process. The big winners over the past few years, things like Bitcoin and the FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google), are on average down nearly 40% for the year. More broadly, U.S. stocks, as measured by the Russell 3000 index, are down nearly 20% for the year, while bonds—typically a powerful diversifier—have fared little better, down about 12% YTD as measured by the Barclays Global Aggregate Bond Index.
It’s worth reiterating that, during such times, it’s important for investors to step back and put some distance between stimulus and response. While negative year-to-date returns are painful—especially after many years of eye-popping gains—how we choose to respond to negative returns today will have a significant impact on the returns we could earn tomorrow. Things like reducing stock exposure, moving to cash, or adding exotic “alternative” investments to our portfolios might feel like the right thing to do right now, these are very serious decisions. None should be taken lightly. Reacting can seriously hurt performance, especially when making decisions in the heat of the moment or based on things far beyond our control. So, what are investors to do?
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