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Don’t Give Up on Investing Despite Recent Poor Performance

This is one of those stretches when you may want to avoid looking at your investments.

Performance reports for the three months that ended in September are arriving now, and they are ugly. The vast majority of mutual funds and exchange-traded funds — the vehicles used by most Americans for their investments — fell. There were losses in most markets and in nearly all asset classes.

If you’ve lost money, take some deep breaths, practice yoga, watch a ballgame, enjoy time with family and friends — whatever works. But don’t make abrupt changes in your investments. A good plan is better than an emotional response when markets fall.

I say all that assuming you already have a solid investment portfolio set up — a simple one, ideally, containing cheap funds, preferably index funds that mirror the total market.

If you don’t have a solid plan yet, a downturn is a great time to start. Most basically, stock and bond prices will be lower than they were just a short time earlier.

But invest for the long term. Hold diversified stock funds for higher returns and bond funds for income and stability (though bonds haven’t been paragons of stability lately), and stick with them. Stash the money you need to pay the bills in money-market funds, short-term savings accounts and Treasury bills.

Keep your costs low and hold broadly diversified investments for years to come. For most people, that’s a much better bet than stock-picking and frequent trading, numerous studies show.

This approach requires the ability to withstand losses, though, and that ability is being tested now.

The average domestic stock fund in the Morningstar database declined 3.5 percent for the quarter. The average taxable bond fund fell 1.1 percent. The average municipal bond fund fell 3.3 percent. As a group, internationally oriented stock funds fared even worse. They declined 4.7 percent.

Furthermore, core stock and bond indexes that function as benchmarks — and, in some cases, are the foundation — for many mutual funds and E.T.F.s. fell during the quarter.

Dividends included, the S&P 500 stock index lost 3.3 percent for the three months through September.

These numbers aren’t shocking in themselves. What makes them painful, however, is that they come after the markets had begun recovering from the steep declines of last year.

It shouldn’t be terribly surprising when the stock market falls. Such declines have made headlines for decades. But bonds are different. They have a reputation for steady, even stodgy performance. The latest returns undercut those assumptions.

For the last quarter, the Bloomberg Aggregate Bond Index (it was once the Lehman Brothers Aggregate Index) lost 3.2 percent, including dividends, nearly as much as the S&P 500. What’s worse, over three years, this core bond index lost nearly 15 percent, including interest paid out in dividends, while the S&P 500 gained about 34 percent.

Those returns understate the bond market carnage. The Bloomberg U.S. Treasury 20+ Year Index, which tracks long-term Treasuries, lost 13 percent for the quarter — and about 42 percent for the three years through September, including dividends.

You don’t need to worry about individual, high-quality bonds if you hold them to maturity. But if you trade them while market interest rates rise, you can incur serious losses.

A major shift in interest rates caused the pain in the bond market and hurt stocks, too.

Recall that during the first stage of the pandemic, the Federal Reserve dropped the short-term federal funds rate to nearly zero in a bid to support the ravaged economy. Then, after inflation became red hot, it began raising short-term rates early last year in an effort to put out the inflation fire. It isn’t done yet.

Longer-term rates in the bond market didn’t rise as much or as quickly at first — perhaps signaling an eventual recession — but longer-term bond rates have been shooting up lately.

Interest rate increases have caused automatic declines in bond prices. That’s a function of bond math. Yields and prices move in opposite directions, so rising interest rates have translated into falling bond prices, especially for securities of longer duration.

For stocks, the effects of rising rates are more complicated. For one thing, utilities and high dividend-paying stocks have been hit hard because their chief virtue — their ability to generate income — doesn’t look nearly as attractive now that high-quality bonds offer reliable payouts of more than 5 percent annually. Beyond that, corporate costs have risen with higher interest rates, slightly impairing corporate earnings in the third quarter.

Gains in the S&P 500 earlier in the year were based largely on investor optimism about future earnings growth. A.I. fever gripped the market, elevating stocks like Nvidia, which supplies computer chips that enable artificial intelligence programs to operate. Nvidia was the biggest gainer in the S&P 500 for the calendar year through September, with a total return of nearly 198 percent.

But the market’s mood has become dour as the Fed has signaled it intends to hold interest rates “higher for longer.”

In September, Nvidia shares flagged, however, with a decline for the month of 11.9 percent.

The stock market is top-heavy, depending disproportionately on a handful of big companies. The 10 biggest stocks in the S&P 500 accounted for nearly 70 percent of the index’s price increase for the calender year through September, according to Bespoke Investment Group. These are Apple, Microsoft, Alphabet (Google), Amazon, Nvidia, Meta (Facebook), Tesla, Berkshire Hathaway, Eli Lilly and Visa.

When some of these stocks faltered in the third quarter, they pulled the market down with them. Apple declined 11.7 percent during the quarter. Because it is weighted so heavily in the S&P 500, it was responsible for one-fourth of the entire index’s decline, Birinyi Associates calculated.

Energy prices rose in the quarter, and that’s caused a variety of problems. Gasoline has been getting expensive again, and higher energy costs are rippling through the economy, complicating the Fed’s battle against inflation, while weighing on the profits of companies that are net energy consumers.

But for some investors, there has been a bright side. Higher prices for energy are a boon for stocks and funds that focus on fossil fuel.

Compare these stock returns for the quarter:

  • Solar Edge, which calls itself “a visionary leader in smart energy technology, committed to harnessing the power of the sun to create a sustainable future,” lost 51.9 percent, the worst quarterly performance in the S&P 500.

Profiting from higher fossil fuel prices is less than ideal if you are worried about climate change. Yet the economy still depends on fossil fuels. And even if alternative energy comes to dominate the future, oil and gas are generating riches now.

Energy stock funds focused mainly on fossil fuels rose 10.4 percent for the three months through September, according to Morningstar, and funds like Vanguard Energy Index Fund and Fidelity Advisor Energy Fund gained more than 13 percent. Exxon was the biggest holding in these funds.

Energy — fossil fuel or alternative — has come in and out of favor, and prices have dropped in October. Where they head next is anybody’s guess.

More broadly, where interest rates and inflation are going — and whether the economy will plunge into a recession — are crucial questions without reliable answers. I’d be skeptical of anyone who claims to know.

Predicting commodity, stock or bond prices is hazardous, at best. You can make big profits if you bet correctly, but you will be taking big risks.

Unless you do this for a living, I wouldn’t go there. Instead, for long-term investing, it’s far more sensible for most people to seek absolutely average returns, without trying to pick favorites or time the movements of the markets.

Just being average has been a solid strategy. Since November 2000, despite numerous crises and downturns, a basic investment with 60 percent stock and 40 percent bonds in broad U.S. market index funds returned nearly 300 percent.

To capture that return, you needed to have kept fees to a minimum, to have held diversified index funds and to have disregarded market dips like this one.

There will be further storms ahead, and big ones. Try to prepare for them, and prosper.


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