Still, Jonathan Clements thinks what’s happening in the stock market in 2022 offers an important lesson for longer-term investors. The story of the financial markets over the past four decades can be told with two data points. In September 1981, the yield on the 10-year Treasury note almost reached 16%. In August 2020, it got as low as 0.52%. The intervening decline in interest rates drove up not only bond prices, but also the value that investors were willing to put on stocks.
But the long tailwind of falling interest rates is all but spent. I suspect today’s sense of economic crisis will pass soon enough, bond prices will stabilize and stocks will rally. But without the tailwind of declining interest rates, longer-term gains for stock and bond investors will come much more grudgingly, and thus the fundamentals of smart money management will be more important than ever.
What does that mean? We need to save diligently, spend prudently—and do everything in our power to pocket whatever the markets deliver. That means buying low-cost broad market index funds, trading infrequently, minimizing taxes and standing our ground in the face of market turbulence. We may not control the direction of the financial markets, but these are things we can control.
Sound like yet another reiteration of the HumbleDollar gospel? It is indeed. That’s the nice thing about sound financial principles. The markets may change, but the principles endure.
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