I come from a family of worriers. As far back as I can recall, my parents emphasized avoiding unnecessary risks. They reminded me to be safe when I left the house and triple-checked the lock on the front door before heading to bed. Decades after moving out—and as I now raise children of my own—my parents still offer a reminder to “be safe” upon hearing I’ll be heading out for an evening with friends.
Needless to say, I can relate to taking a cautious perspective towards the most precious things in one’s life, like family and hard-earned life’s savings. Looking for what could go wrong is understandable. After all, bad things happen, risks undoubtedly exist, and the modern media age offers plenty of reminders of both.
Unsurprisingly, many investors and clients are in a heightened state of concern about their portfolios and the outlook for markets. After all, there seem to be countless circumstances that could send the market or economy into a tailspin. War. Inflation. Growing national debt. That darn (insert your preferred political antagonist).
Of course, this is not the first time the markets and economy have faced turbulence. In the past, investors have endured World Wars, energy crises, and stock bubbles, and those that persevered were rewarded with strong returns. Now, investors should take heart in knowing that while things may feel uncomfortable, we’ve been through this before.
Let’s look at some historical data.
Looking back at inflation
The markets and economies we participate in have substantial histories to review for insight into what may lie ahead. Let’s begin with the concerns related to inflation. The graphic below looks at economic data since 1926 and reflects the nine prior instances of significant inflation and the returns to stocks and bonds 12 months after the peak. Except for stock returns during the Global Financial Crisis, every previous occurrence produced attractive gains one year later. These results establish an encouraging initial data point contrasting the current negative outlook.
Looking back at recessions
The prospect of a looming recession is another common concern, and rightfully so, with the preponderance of forecasters suggesting the U.S. will tilt into negative growth in the coming quarters. While such prognostications are far from certain, we can review the historical performance of equities throughout recessions. When reviewing stock performance before, during, and following the recessions since 1926, we see that, on average, equities were modestly positive in the periods immediately before and during a downturn and robustly positive in the years that followed. These results provide another encouraging data point, given the current forecasts anticipating a recession sooner rather than later.
Reasons for optimism—but still be prepared
We can take some encouragement from long-term historical data, but, as my family would remind me, it never hurts to be prepared. In that spirit, we encourage each of our clients to review their financial plan with their advisor and consider whether including alternative investments in their portfolios aligns with their financial objectives and tolerance for risk. These investments include alternative asset classes, such as real estate and private debt, and alternative strategies, such as diversifying hedge funds. Of course, none of these strategies are silver bullets on their own, but they may generate unique sources of return and, collectively, serve to balance a portfolio with additional diversification. As a result, we believe portfolios with alternative investments may produce attractive returns relative to the potential risks, allowing investors to sleep a little better at night. After all, there are more important things to worry about.