As the year draws to a close,it is time for the annual tradition of the year in review article. Rather than simply recounting a perplexing year in markets and the overall economy I thought I would try and take a step back and attempt to provide some perspective.  

Rather than simply recounting a perplexing year in markets and the overall economy I thought I would try and take a step back and attempt to provide some perspective. I was recently reading the foreword of The Best and the Brightest. In writing the book David Halberstam completed his journey from journalism at a daily paper to a long-form magazine and finally to author. He was describing how at each stage of this journey how his worldview was conditioned to match the scope of his work product. When he was a journalist at a daily paper, he would approach issues of the day with a perspective shaped by the need to produce 800 words in 24 hours. This perspective expanded to encompass four or five weeks of research and writing at the long-form magazine. It stretched into multiple years as an author. This is an important reminder that as investors our perspective should reflect our investment time frame.

Most individual investors need a long-term perspective. The average age of an Australian was 37.88 years old in 2020. The average Australian lives to 83.5 years old. Enough said. Yet we consume news about investing that is centred around the short-term news cycle. This disconnect has consequences. An investing perspective focused on the next month or the next quarter means a fixation on what will impact the market over that time frame. Will central banks hike rates by 75 bps or 50 bps? Will central bank meeting minutes be interpreted as hawkish or dovish? A focus on the short-term leads to situations where the market interprets bad news as good news. In that scenario a slowing economy or rising unemployment will lead to a market rally because it may mean that central banks will slow of pause rate hikes. This short-term focus is a sucker’s game. It is the equivalent of betting on the coin flip at the beginning of a sporting match when what matters is the final score.

We gain perspective when we take a step back and start thinking about the issues of the day in the context of the next couple years and decades. Instead of fixating on the detail we see the bigger picture. We entered this year at historically high valuation levels and historically low interest rates. Perhaps these valuation levels were justified as falling interest rates lead to increases in prices for bonds, shares and housing. Given the scope of the interest rate cuts and fiscal and monetary stimulus in recent years it is justified that we’ve experienced above average returns. What isn’t justified is thinking that interest rates could always be historically low. That valuations levels could always be historically high. And that returns could always be above average.

Taking a longer-term view provides an opportunity to reinterpret what happened this year. It allows a more contextualised assessment of each singular event that seemed so meaningful at the time. Right out of the gate the S&P 500 and ASX 200 fell by over 10% in January. Buy the dip screamed the short-term crowd. Not so fast we cautioned on an episode of Investing Compass called A ‘sale’ worth skipping published on January 30th. Did this call come from a unique set of information? It did not. Was it because of an innate ability to interpret public information better than everyone else? It was not. The short-term crowd’s perspective was that shares were 10% cheaper than they were at the start of the month. They were correct. The longer-term perspective was that shares started the year at the second highest CAPE ratio ever which made a 10% fall inconsequential. That didn’t mean the market would stop falling. It also didn’t mean it was time to abandon a long-term plan in order to ‘buy the dip’.

Investors spent the year fixated on central banks. We had short-term rallies in March, May and July / August. The short-term view was that interest rates had risen so much that we must be approaching the end of the hikes. That mindset makes it easy to interpret each utterance by a central banker as dovish. Cuts must be around the corner. At the end of November, the RBA cash rate sits at 2.85%. That is a full percent below the average rate between 1990 and 2022. I don’t know where rates will settle. Neither do you. Rates are high when viewed in comparison to .10%. They aren’t so high when looking at average rates over the last 32 years.

The events of this year seem profoundly consequential. And perhaps we are at an inflection point as many of the deflationary counterweights to inflation since the mid-1980s have started to unravel. Yet what has happened this year has been relatively benign when compared to previous bear markets. A market that was firmly ensconced in Bubbleville, fell. The priciest markets like the US fell more. The technology sector and shares without earnings fell more than the broader market.

Much of the advice we get about life is pithy platitudes. We are told it is about appreciating the little things. Savouring those special moments. Life is not investing. Investing is about ignoring the little things. Detaching yourself from the day-to-day moments that simply have the appearance of consequence. Abraham Lincoln once said, “I may walk slowly but I don’t walk backwards.” That is advice that you can apply to your life and your portfolio. I hope this year was one of progress towards your goals. Sometimes that progress comes in leaps and bounds. Sometimes it comes through the acquisition of wisdom gained in times of adversity. In the long-run they both matter. And the long-run is the only perspective that ultimately matters.