It looks like a perfect storm. There’s talk of the President’s impeachment. The rumors, alone, could hurt global markets. Experts say a recession is coming. Several economic forecasts say inflation is on the rise. It could hit 12 percent or more.
Home mortgage interest rates might soon hit double digits. Tensions in the Middle East are heating up again. The Middle East is threatening to limit the sale of oil to the west. Some forecasts say fuel shortages might be coming. That could mean day-long lines to put gas in your car. There’s even risk of Nuclear war. At least one rogue nation is stepping up aggression.
These are uncertain times. Many people wonder how to protect their investments. Others haven’t yet started to invest. They’re afraid to commit because nothing seems stable.
But I didn’t describe a forecast for the future. Instead, I described the past. It was 1974. President Nixon was on the chopping block. Inflation and mortgage interest rates soared above double digits. Oil prices went through the roof. A Middle East-led embargo meant Americans sometimes waited an entire day to fuel their cars. Inflation and mortgage interest rates kept ticking upward. Communism was spreading and people feared a nuclear war.
Those were uncertain times. People might have wondered, “What should I do with my money now?’ But thirty years later (by 2004) U.S. stocks had gained more than 3,300 percent.
Investing is simple. But it isn’t easy. Our heuristic bias is partly to blame. A heuristic bias means that whatever is happening right now is foremost in our minds. Consequently, we believe the world, the economy or the stock market is most dangerous right now. You might relate, if you’ve had these thoughts:
- “We can’t invest now because of the trade war with China.”
- “We must do something different with our money because of the inverted bond yield.”
- “We need to be careful with our money because stocks are at all-time highs.”
- “Government debts are too high, so we shouldn’t invest now.”
Every generation faces uncertain times: The Great Depression, World War I, World War II, the Cold War, the oil embargo, run-away inflation in the 1970s, Y2K, the 1997 Asian financial crisis, the 2008 global financial crisis.
In fact, not a single year in history faced certain times ahead. Yet, despite uncertain times, stocks have performed well over rolling 30-year periods.
You might not be interested in 30-year returns. But that’s a mistake. Too many investors think short-term. Single year returns don’t matter one bit. Even decade-long returns aren’t as relevant as we think.
Consider someone who retired in January 2000. It would have been one of the worst years to retire. After all, it marked the beginning of the so-called “lost decade” for U.S. stocks. The stock market crashed in 2001-2002. Stocks crashed again in 2008. From January 2000 to January 2010, U.S. stocks gained a compound annual return of just 1.2 percent.
This was an uncertain time. But anyone who retired in January 2000 would have been fine if they followed three important rules:
- They had a diversified portfolio of low-cost index funds
- They employed the 4% rule
- They ignored economic and market news
In January 2000, if someone had a portfolio comprising 40 percent U.S. stocks, 20 percent international stocks and 40 percent bonds, they could have withdrawn an inflation-adjusted 4 percent per year. After 19 years, they would have withdrawn a total of $96,471 from their initial $100,000 portfolio. Yet despite those withdrawals, they would have about $112,000 by September 30, 2019.
In other words, 19 years after making regular withdrawals, they would have had more money than they did when they first retired.
If someone retired in 1929 (right before history’s biggest stock market crash) they could also have withdrawn an inflation-adjusted 4 percent per year. This was an uncertain time. But their money would have lasted at least 30 years.
Someone could have retired in 1973, on the eve of the next biggest market crash. This was also an uncertain time. But despite run-away inflation, they could have withdrawn an inflation-adjusted 4 percent per year. Their money would also have lasted at least 30 years.
Smart investors don’t worry about uncertain times because there are no certain times. If someone has a lump sum to invest, they shouldn’t try to wait for stocks to drop. They should ignore economic news and invest it right away. If someone doesn’t have a lump sum, but they’re earning a salary, they should invest every month.
Stock market crashes will always come. But neither you nor anyone else is going to see them coming. Those who gamble and win almost always end up losing. Fortunately, stock market crashes shouldn’t affect long-term thinkers. They shouldn’t affect a disciplined retiree. Nor should they hurt young investors. After all, stock market crashes are great for young investors.
Yes, we’re facing uncertain times. But uncertainty is certain. It always has been and it always will be. Unfortunately, our tendency to speculate—to be driven by fear and greed—costs a lot of money. Instead, build a diversified portfolio of low-cost index funds, and no matter what happens, stay on course.
Related Columns For Further Reading
- Should Investors Fear a Trade War with China?
- How a Stock Market Crash Could Accelerate Your FIRE
- Should You Worry When Stocks Hit All-Time Highs?
- When Stock Market Promises Aren’t Realistic
- Should Investors Fear The Inverted Yield Curve?
- Stocks Are Going To Crash, So Are You Ready For It?
Andrew Hallam is a Digital Nomad. He’s the author of the bestseller Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas