Here you can view DFA's Q1, 2020 Market Summary Report; on page 3, you’ll find lots of big red arrows! So far in Q2, we’re seeing green arrows across many major market sectors, we’ll know by the end of June if we can solidify those arrows for Q2, but we’ll be prepared and we’ll let markets do their thing – which is allow us to take on risk and uncertainty in return for wealth building and inflation beating.
“Markets are designed to handle uncertainty.” - taken from page 18
We are in very uncertain times right now – times we haven’t seen since 2008 / 09. Markets handle new information in real-time as that information becomes available. Throughout the second half of Q2, markets have digested new information resulting in a negative response sending market prices lower because investors are reassessing expectations of the future.
And this is OK…this is normal!
Short-term market expectations can be positive (markets move up) and negative (markets move down), but long-term expectations have only one position (positive) and one direction (up)! If our retirement portfolios call for owning stocks this means multiple things: we are looking to build wealth and invest in instruments that historically beat inflation’s purchasing power eroding abilities*; and we understand short-term stock movements are wild and unpredictable, but long-term stock movements are far less wild and far more predictable.
*that’s a cumbersome statement. Explained better: inflation erodes our purchasing power. Per the definition, over time what a dollar can buy today will buy less of tomorrow. Historically, inflation is about 3% per year; if we have $100 today, one year from now we’ll still have $100, but its purchasing power would be about $97. This is bad! Cash is comfortable, but it just sitting around and losing 3% of its purchasing power every year is very bad, so we need to counteract that. And we do that by investing our extra – extra because we first want to have a properly-funded emergency account – into stocks and bonds. Stocks give us the best inflation beating returns, but they come with the most volatility, while bonds come with less volatility but the trade-off being their less, if any, inflation beating returns.