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Fall 2023 Market Udpate

Markets are up meaningfully from this time last year, having recovered from their low points in 2022.


Let's look at the performance of global markets over the last 12 months as well as the major events that took place. Note that the larger chart shows performance back to September 2022 while the smaller chart shows performance going back to 2000.


The performance figures above reflect the movements of an index. An index is a list of specific stocks or bonds that make up a hypothetical portfolio.


By following the performance of an index, we can get a sense of how a particular part of the market is performing. For example, the S&P 500 Index is a hypothetical portfolio of the 500 largest companies in the US and its performance gives us a window into how large US companies are doing overall.


The index used in this chart is the MSCI ACWI, a hypothetical portfolio that tracks nearly 85% of the world's investible stocks. It includes companies from the US, 22 other developed countries, as well as 24 emerging markets. This makes it a reasonable way to gauge how global markets are performing overall.


(Keep in mind that these figures are inherently different from our own performance given that we might own a different subset of investments and we may have made deposits, withdrawals, purchases, or sales that would change the outcome.)

Now, let's look at how different parts of the market (called asset classes) performed during various periods of time. First, let's look at the performance for the most recent quarter.



As the red arrows make clear, markets were down across the board in the third quarter. Real estate was hit hardest, as we might expect given how sensitive this asset class is to higher interest rates. Within stocks, emerging markets performed best followed by US stocks, large companies in particular.


Let's see how different things look if we examine these same asset classes over longer periods of time. Below are annualized returns for the stock and bond markets over the last one, five, and ten years.



As you can see, over longer periods, returns are positive across every asset class and different parts of the market emerge victorious depending on the time period you choose. This data serves as a good reminder of a few important investing principles.


Diversification

Different parts of the market outperform at different times. Even when stocks are up or down across the board, each asset class will likely have varied returns. The point of diversification is owning assets that don't behave in the same way so that when one part of the portfolio is down, another part of the portfolio can prop it up. This helps to reduce your risk without sacrificing your return.


Perspective

Longer time periods paint a very different picture than a narrow view of the present. Imagine how your perspective would have differed had I led with the third-quarter data and failed to include the broader context of how markets have performed over longer periods. It would be natural to interpret that data as negative or even concerning. That is something to remember when you are reading or watching the market headlines of the day. The minute-to-minute investment news may grab attention but it often fails to incorporate the broader context of what is happening.


Discipline

Perspective is so critical because it drives our actions. If our short-term perspective is overly positive or negative, we might seek out behaviors that cause us harm in the long term (think investing only in tech stocks or pulling money out of the market mid-crisis). This is why I can't stress enough how important it is to keep short-term market movements in perspective.


We don't need to recreate the wheel for every news cycle. The energy we could spend figuring out how to react to the crisis of the moment would be better spent maintaining a disciplined investment strategy that will get you through more than the next quarter, year, or even decade.


Below is an illustration of a simple buy-and-hold strategy. It shows that had we put $1 into the MSCI World Index in 1970 and never touched it since it would now be worth $80. The strategy doesn't have to be buy-and-hold but incorporating discipline into your investing practice has its clear rewards.


Key takeaway:

Market information can be useful in its proper context and in conjunction with an investment approach based on diversification and discipline.






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