3 Things 4-21-25

 Thing One

An Investing History Lesson For Uncertain Times 

Dennis Coughlin of Kipliger recently advised the following with respect to the volatile markets we are currently experiencing, “…Acknowledge the persistent nature of uncertainty. Markets have endured wars, recessions and regulatory changes throughout history. Investors who remain focused on long-term strategies rather than reacting to short-term disruptions may experience more sustainable outcomes over time…”

We agree and would like to add the following:

Uncertainty is an inherent and persistent feature of financial markets, woven into their very fabric. From geopolitical conflicts to economic downturns and sweeping regulatory shifts, markets have faced a litany of challenges throughout history. Wars, such as World War I and II, disrupted global trade and economies, while recessions like the Great Depression of the 1930s and the 2008 financial crisis triggered sharp declines in asset values. Regulatory changes, such as the Glass-Steagall Act of 1933 or the Dodd-Frank Act of 2010, have reshaped the financial landscape, often introducing new complexities. Yet, despite these upheavals, markets have consistently demonstrated resilience, recovering and often reaching new heights over time. This historical perspective underscores a critical lesson for investors: staying committed to long-term strategies, rather than reacting impulsively to short-term disruptions, can lead to more sustainable and rewarding outcomes.

Historical data supports the case for long-term investing. Consider the S&P 500, a broad measure of U.S. equity performance. From 1928 to 2023, the S&P 500 delivered an average annualized return of approximately 9.8%, including dividends, despite enduring numerous crises. For instance, during the Great Depression, the index plummeted by nearly 86% from its peak in 1929 to its trough in 1932. Yet, investors who held their positions or continued to invest during the recovery saw significant gains in the subsequent decades. Similarly, the 2008 financial crisis saw the S&P 500 drop by over 50%, but by 2013, it had fully recovered, and by 2023, it had more than quadrupled from its 2009 low. These examples illustrate that while short-term volatility can be daunting, markets have historically rewarded those who maintain a long-term perspective, allowing time for economic cycles to stabilize and growth to resume.

The psychological challenge of enduring uncertainty cannot be understated, as short-term market fluctuations often provoke fear and impulsive decision-making. However, data highlights the peril of attempting to time the market. A study by J.P. Morgan Asset Management (1993–2022) showed that an investor who remained fully invested in the S&P 500 over this period achieved an annualized return of 9.6%. In contrast, missing just the 10 best trading days reduced the return to 5.6%, and missing the 30 best days slashed it to 1.7%. This stark difference underscores the cost of reacting to short-term disruptions, as the market’s best days often occur unexpectedly, frequently during or shortly after periods of heightened volatility. Long-term investors who stay the course, rather than attempting to predict or avoid downturns, are more likely to capture the full scope of market growth over time.

In summary, the history of financial markets is a testament to their ability to endure and overcome uncertainty, from wars and recessions to regulatory upheavals. While short-term disruptions are inevitable and can test investor resolve, the data is clear: long-term strategies grounded in patience, diversification, and discipline have historically delivered robust results. The S&P 500’s nearly century-long track record, the pitfalls of market timing, and the stabilizing effect of diversified portfolios all point to the same conclusion. Investors who embrace uncertainty as a natural part of the journey, rather than a signal to retreat, position themselves to achieve sustainable success over time, harnessing the market’s proven capacity for recovery and growth.

Thing Two

A Place To Hide But Not For The Long Term

A concerned client recently asked us about “investing” in gold and it prompted us to do some research on the topic.  Below is our synopsis of what happened to gold over the 40 years prior to the pandemic:

In 1980, gold peaked at $612.56 per troy ounce amid high inflation and geopolitical tensions, including the Soviet invasion of Afghanistan. By 2020, its nominal price reached $1,769.64. Adjusted for inflation using the Consumer Price Index (CPI), gold’s annualized real return over these 40 years was approximately 0.3%. This low return stems from extended periods of price stagnation, particularly in the 1980s and 1990s, when gold fell to $252.80 by 1999. However, gold shone during specific crises, such as the 2008 financial crisis, when it gained 4.3% in 2008 while equities plummeted, and in 2020, when it surged 24.43% amid the COVID-19 pandemic. These spikes highlight gold’s defensive appeal, though its lack of income generation limits its long-term growth compared to equities.

In contrast, the S&P 500 delivered significantly higher real returns over the same period, driven by corporate earnings and economic expansion. In 1980, the S&P 500 index stood at around 118 points, and by 2020, it had climbed to approximately 3,756, including reinvested dividends. Adjusted for inflation, the S&P 500’s annualized real return from 1980 to 2020 was about 8.1%, according to data from MacroTrends and historical CPI figures. This robust performance reflects the index’s ability to recover from downturns, such as the 50% drop during the 2008 crisis, and capitalize on growth periods, like the tech-driven rally of the 1990s and the post-2009 recovery. Despite sharp volatility, the S&P 500’s long-term upward trajectory underscores the power of compounding returns in equities for patient investors.

The stark contrast between gold’s 0.3% and the S&P 500’s 8.1% real annualized returns highlights their differing roles in a portfolio. Gold’s low correlation with equities—often near zero or negative—makes it a valuable diversifier, stabilizing portfolios during market turmoil. For example, during the 2000–2002 dot-com crash, when the S&P 500 fell 40%, gold’s nominal price rose from $279 to $347.20. However, gold’s inability to generate dividends or interest caps its long-term potential, while equities benefit from corporate profitability and reinvested earnings. A J.P. Morgan study (1993–2022) illustrates the risk of abandoning equities during volatility: missing the S&P 500’s 10 best days reduced returns from 9.6% to 5.6%. Investors who sold equities to chase gold during downturns often missed these critical rebounds, emphasizing the cost of short-term reactions.

That said, since the pandemic gold has outperformed the S&P 500’s 9.1% real rate of return as its real rate of return from January 2020 to April 2025 was approximately 12.7%. But again, that’s a reflection of its strength during a crisis rather than its soundness as a long-term investment.  So, if you’re looking for a place to hide when the fan is splattering stuff everywhere, gold might be worth considering.  But it’s not likely going to be the best idea for the long term.

Thing Three

Just A Thought 

“Keep your face always toward the sunshine—and shadows will fall behind you.” — Walt Whitman