As the holidays begin, it's a good time to think about what we're grateful for in our personal lives and our investments. Investors often worry about what might go wrong instead of appreciating what has gone well. Right now, with markets doing well, it's useful to look back at the past year as we prepare for what's ahead.
This year has been good for investors. The S&P 500 (a measure of large U.S. stocks) has gained over 15% including dividends. Bonds (loans to companies or governments that pay interest) have returned about 7%. International stocks have done better than U.S. stocks for the first time in years. Many balanced portfolios (mixes of different investments) have benefited from these gains.
Markets have been rising for three years
First, we can be thankful that markets have done well this year. This bull market (a period when prices are rising) started in October 2022 and is now in its fourth year.
History shows that bull markets usually last longer than bear markets (when prices are falling). Bull markets often run for five to ten years or more. The typical bull market delivers much higher returns than what we've seen so far. This is why it's important to stay invested for the long term through different market conditions.
Bond returns are also worth noting after several difficult years of rising interest rates and inflation (when prices for goods and services increase). As the Federal Reserve (the central bank that manages interest rates) has started lowering rates, bond prices have recovered. This shows why owning both stocks and bonds is important for balanced portfolios.
Inflation has slowed and interest rates are coming down
Second, we can be grateful that inflation has improved. Prices have risen about 3% over the past year, which is still a challenge but much better than before. Inflation is now more stable, and fears of rapidly rising prices have eased.
This has allowed the Federal Reserve to start cutting interest rates. Lower rates typically help both stocks and bonds by making it cheaper for businesses and consumers to borrow money. While inflation and rates will remain important, the worst appears to be behind us.
Spreading your money across different investments helps manage risk
Finally, we should appreciate the value of proper asset allocation (how you divide your money among different types of investments). The year ahead will bring new uncertainties, as every year does. When this happens, it's natural to worry. Rather than reacting to every market event, it's better to hold a balanced portfolio that can handle different market conditions.
Risk management is especially important after a three-year rally. Stock valuations (how expensive stocks are compared to company earnings) are above average. This doesn't mean markets can't keep doing well in the short term, but it suggests future returns might be more modest. That's why it's important to have realistic expectations and own different types of investments.
The bottom line? The holidays are a good time to reflect on reasons to be thankful and review your portfolio. A well-built portfolio balances different types of investments and aligns them with your financial goals. This is the key to navigating challenges and opportunities ahead.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.