Three reminders for 2024

Debra Slabber

I always like to start a new year reflecting on the last, especially taking stock of the lessons I learned.

The article below unpacks three reminders that stood out to me in 2023 from a market and investing perspective:

1. Short-term predictions add little value
2. Returns are often earned in a short amount of time
3. Volatility is a bad indicator of risk

1. Short-term predictions add little value
Investors came into 2023 on high alert for a potential recession and scars from 2022’s brutal sell off in both bond and equity markets. At the end of 2022, The Financial Times published an article1 that stated that 85% of economists predicted that there would be some form of recession in 2023. The recession hasn’t materialized, and the US economy continues to show resilience. The more interesting prediction came from Wall Street strategists who predicted the first negative year in stock markets since the 2000’s (Exhibit 1 below).

These types of predictions are often off by a wide margin and the only value in market strategist forecasts is that they show the wide dispersion of outcomes that are possible. Investors are best served following Warren Buffett’s advice on forecasts: “We have long felt that the only value of stock forecasters is to make fortunetellers look good.”

It is very hard (or rather, impossible) to accurately predict what will happen on the macro side and how markets will react based on that.

Nervous investors who decided to hide in cash because most economists were predicting a recession and Wall Street predicted a negative year for stock markets, would have missed out on roughly 10%2 (in USD terms) from a return perspective in 2023.

2. Returns are often earned in a short amount of time

Historical evidence demonstrates that returns are often earned in a short amount of time. As illustrated below (in Exhibits 2 and 3) over the 88 years from 1936 through 2023, the S&P 500 returned 10.65% (annualized). If we were to remove the returns of the highest-returning 88 months, the return of the remaining 968 months would be virtually zero. The remaining 986 months provided an average annual return of -0.26%. The best 88 months (just 8.3% of the months) provided an average annual return of more than 100% of the annualized return over the full period.

This lesson goes hand in hand with the reminder that time in the market is superior to timing the market, to remain invested through the good and the bad times and that investors should avoid the temptation of chasing performance.

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