5 Biggest Mistakes That Investors Make

Key Points to Remember During Times of Market Volatility

In times of economic volatility, it is important to remember that markets have historically rewarded long-term investors.

  • Rarely have we seen quarters with both stocks and bonds down at the same time. From March 1979 – March 2022, only 8% of quarters have experienced negative returns from both US Stocks and US Bonds (14/173 quarters). (1) Periods like we are seeing today are not unprecedented, but they can be uncomfortable.
  • It is normal to be nervous, but you do not have to be scared. By accepting that uncertainty is part of investing, you can avoid unnecessary anxiety. If investing were a definite slam dunk without ambiguity, there might not be a reward. For an investment to do better than a money-market fund, it needs to carry risk.
  • Information about risk and returns are being incorporated into market prices. A stock or bond’s price reflects the aggregate expectations of all market participants. These expectations can include macroeconomic and company-specific factors as news develops. If you read an article about what XYZ news means for ABC company, it is likely that the information has already been incorporated by other buyers and sellers.
  • History shows us that markets have rewarded long-term investors. Think all the way back to two years ago. In March of 2020, the S&P 500 Index declined 33.79% from the previous high as the pandemic worsened. (2) Even if investors were able to time getting out of the market, they were probably unable to correctly time getting back in. As more information became available, the S&P 500 Index jumped 17.57% from its March 23 low in just three trading sessions. Investors who fled to cash in an attempt to time the market may have lost significantly.
  • As always, there are many headlines with frightening narratives, but which ones are relevant? You may have heard that an inversion of the yield curve will lead to a market downturn. This may lead to a few questions such as what is a yield curve? What is an inversion? Will this affect me? A recent article from Dimensional Fund Advisors (Is a Yield Curve Inversion Bad for Stock Returns?) found that an inversion may not be a reliable indicator of stock market downturns. In 10 out of 14 cases of inversion, equity investors had positive returns in their home markets after 36 months. (3)
  • The Fed has also been getting attention recently as it announced plans for a series of rate increases to combat inflation. On average, US equity market returns are reliably positive in months with increases in target rates. (4) Similarly, within bond markets, periods of rising rates do not necessarily result in negative returns.
  • Cryptocurrencies have not been unphased either. Despite the endorsements of celebrities like Matt Damon, Kim Kardashian and Elon Musk, crypto markets experienced a sell-off in what was described as a “perfect storm.” Although many investors invested in crypto as a safe alternative to equities, Bitcoin was down more than 40% as of May 12th. So-called “stable coins” were also impacted as they experienced volatility and failed to deliver their own USD pegs. While we cannot predict the future, this is a reminder that the expected returns of cryptocurrencies are still unclear. (5)
  • FAANG (Facebook, Amazon, Apple, Netflix, and Google) stocks in particular have posted disappointing returns this year. As of May 5th, the group collectively underperformed the Russell 3000 Index by nine percentage points. (6) This reversal is a warning about the allure of assuming past returns will continue in the future.
  • One asset class is not down – commodities. But just because commodities were up 25.55% in Q1, that does not mean you should go all in on the asset class. (7) While commodities are often touted for inflation protection, research shows that they may be too volatile as an effective hedge against inflation. Despite recent positive performance over the past 10 years ending 3/31/2022, US commodities have had a return of -.70% annualized. Deciding to add an allocation to commodities now my just be another example of market timing.
  • While the future is uncertain, the quality of your choices does not have to be. When headlines scream do something, remember lessons learned. A financial advisor can integrate your unique needs into a plan that you can stick with in good times and bad. They can help determine if it makes sense to make adjustments such as rebalancing or tax loss harvesting. There are things that matter and things we can control, focusing on the overlap between the two can lead to a better investment experience.

This post was prepared and first distributed by Dimensional Fund Advisors.

(1) US Stocks: Russell 3000 Index. US Bonds: Bloomberg U.S. Aggregate Bond Index.

(2) S&P data © 2021 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Indices are not available for direct investment

(3) The data showed a 71% chance (10 of 14) of a three-year positive return following a yield curve inversion. To compare, we measured returns three years following every month-end between January 1985 and December 2014 in each of the five markets based on the local currency MSCI indices. The average chance of a three-year positive return in those five markets was 77%.

(4) The Federal Open Market Committee (FOMC) holds eight regularly scheduled meetings per year and may not change the target rate at every meeting. The FOMC may also change the target rate multiple times within the same month; in such instances, we aggregate all changes by month. (link)

(5) “Cryptocurrencies Melt Down in a ‘Perfect Storm’ of Fear and Panic,” New York Times, May 12 2022

(6) FAANG stock returns are computed as the average of Facebook (Meta), Apple, Amazon, Netflix, and Google (Alphabet share classes A and C) weighted by market capitalization at beginning of month.

(7) Commodities returns represent the return of the Bloomberg Commodity Total Return Index.

This information is provided for registered investment advisors and institutional investors and is not intended for public use. Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.

Past performance is not a guarantee of future results. Indices are not available for direct investment.

Commodities include increased risks, such as political, economic, and currency instability, and may not be suitable for all investors. This information is intended for educational purposes and should not be considered a recommendation to buy or sell a particular security. Named securities may be held in accounts managed by Dimensional. The content above pertains to cryptocurrency. Certain cryptocurrency offerings may be considered a security and may have different attributes than those described above. Dimensional does not offer cryptocurrency.

Impact Advisors Group LLC (“[IAG]”) is a registered investment advisor offering advisory services in the State of Massachusetts and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The information on this site is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This information should not be relied upon as the sole factor in an investment making decision. Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made will be profitable or equal any performance noted on this site. The information on this site is provided “AS IS” and without warranties of any kind either express or implied. To the fullest extent permissible pursuant to applicable laws, Impact Advisors Group disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement, and suitability for a particular purpose. IAG does not warrant that the information on this site will be free from error. Your use of the information is at your sole risk. Under no circumstances shall IAG be liable for any direct, indirect, special or consequential damages that result from the use of, or the inability to use, the information provided on this site, even if IAG or a IAG authorized representative has been advised of the possibility of such damages. Information contained on this site should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security in any jurisdiction where such offer, solicitation, or recommendation would be unlawful or unauthorized.