7 Lessons From 2024
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1) Returns Are Lumpy
The stock market goes up over time, but not all the time. It’s far from straight line higher and most years do not look like the 10% historical average. Returns are lumpy as we’re seeing once again in 2024.
Including dividends, the S&P 500 is now up over 29% this year. That sounds abnormally high, but is actually more common than you might think. The S&P 500 has finished with a total return above 25% in 26 out of 96 years since 1928. That’s 27% of the time.
2) Price Targets Are Pointless
At 6,090, the S&P 500 is now 690 points above above the highest 2024 year-end price target from Wall Street strategists and 25% above the average target (4,861).
The most bearish target came from JPMorgan, the biggest bank in the world with access to some of the smartest minds and more data and information than anyone else.
What did they foresee? Lackluster earnings growth (2-3%), rising geopolitical risks, softening economic demand, and a price target of 4,200 with a “downside bias.”
And what actually transpired?
Earnings growth of 10%, stronger-than-expected economic growth, and a significant boost in investor optimism (17% multiple expansion).
At the start of the year, who could have foreseen this combination of events?
No one, which is precisely why you shouldn’t invest based on predictions.
3) Embrace Panic
On the morning of August 5, panic was in the air.
Japan’s Nikkei 225 Index had just suffered its largest 2-day decline in history (-17.5%), even bigger than the October 1987 crash.
Fear of the unwinding “carry trade” spilled over into the US markets, and the Volatility Index ($VIX) spiked to over 65, its highest level since March 2020.
Investors who embraced this panic would soon be rewarded, with the S&P 500 quickly recovering from its losses that day. The S&P 500 is now up over 19% from the panic lows on August 5.
This is not an unusual occurrence. The best historical returns tend to follow periods with greatest amount of fear and volatility.
Speaking of volatility – it’s the most mean-reverting series in markets. Spikes are invariably followed by a return to normalcy. Today, the $VIX is back under 13, its lowest level since July. Does that mean the coast is clear with only smooth sailing ahead? Not at all. Another panic is coming, it’s only a matter of time. Now you know what to do when it comes.
4) Tune Out the Noise
Every day of every month of every year there is noise.
The media’s job is to amplify that noise, getting the most views and clicks. The more noise the better.
Any discussion of politics naturally generates strong emotions, and the media loves to play on these emotions to create additional drama.
Entering 2024, we were told that “Presidential Election Years Are Bad for Stocks.”
Then, throughout the year we were told that you “Should Sell Off Stocks Before the Election” to avoid the uncertainty of the election outcome.
Does the data support the notion that investors should avoid Presidential election years?
Not at all. Historically, US stocks have actually outperformed during election years (10% gain vs. 9.7% in non-election years) with a higher percentage of positive returns (83% vs. 69% in non-election years).
And how have stocks fared thus far in 2024?
The S&P 500 is off to its best start to a year since 1997. It was up 23% before the election and has continued higher thereafter, with a total return now above 29%.
The S&P 500 has hit 57 all-time highs this year, the 5th most in history. Certainly not a year you would have wanted to avoid.
It’s the media’s job to entertain, creating as much noise as possible. As an investor, it is your job to ignore this noise and stick with your long-term portfolio and plan.
5) Diversification Is Simple, But Not Easy
The concept is simple: don’t put all your eggs in one basket.
By combining assets with different fundamental drivers you can achieve lower volatility, better risk-adjusted returns, and increase your odds of sticking with a portfolio over time.
So what could be difficult about that?
If you have a diversified portfolio, you’re always going to own something that’s underperforming and you’ll never be concentrated in the top performing asset class of the moment.
While the best and worst are frequently changing, outperformance trends can persist for years on end. Over the past decade plus we’ve seen the longest period of outperformance from US Large Cap Growth stocks in history. The temptation: keep these stocks and dump everything else in your portfolio.
Is that a good idea?
Only if you have a crystal ball that reveals who the winners of the future will be. There’s a cycle to everything and nothing outperforms forever. Just ask any investor who lived through 2000 to 2009…
6) There Is No Impossible In Markets
10 years ago Nvidia was a $10 billion company with net income of $585 million.
Today it has a market cap of over $3 trillion with net income of $63 billion and rising. It is now the 2nd largest company in the world, trailing only Apple.
How did it get there?
With a gain of over 27,000% and earnings growth of more than 50% per year.
There is no impossible in markets.
7) Time > Money
How is it December already? Where did the year go?
The most important lesson for investors each and every year has nothing to do with investing. It has everything to do with time and how you spend it.
As Naval once said: “Money doesn’t buy happiness – it buys freedom.”
The main benefit of building wealth is that it gives you the freedom to spend your time in ways that bring the most meaning to your life. Many who have that freedom don’t use it and fewer still use it wisely.
Why? Because they think they have time…
And that’s it for this week. Thanks for reading!
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