Red Flags

BY | April 4, 2022

Every time investors go to the beach (the markets) to see if it’s safe to get in the water (invest), there are going to be red flags flying.

This Time It’s Different……..Not Really

For Austin residents, it is hard to fathom what our city looked like just 10 years ago much less back in 1980. I came across this newspaper clipping on a website highlighting local area construction development. What stood out to me was the title of the article, “Development of downtown surges despite woes over interest rates…” This was written in the Austin Statesman by Bill Collier in April of 1980 and yet, some 42 years later you could use the very same title in today’s Austin Statesman. The title would fit right in today as downtown is still booming and interest rates are still a concern. We have the hindsight of knowing how Austin turned out despite those concerns over interest rates 42 years ago. What red flags will the headlines be covering next month, year, decade, and even 42 years from today? I have no clue as to what the world has in store for us, but I am confident that the journey will be lined with red flags.

Learning to Live with the Red Flags

This graph below from Dimensional Fund Advisors demonstrates how markets have consistently recovered over time after new red flags appear.

Figure 2 - Dimensional Fund Advisors

Figure 2 – Dimensional Fund Advisors

Let us not forget that 2021 had its fair share of events to scare off would be investors:

Figure 3 – Avantis Investors

Despite all the major events that unfolded in 2021, the S&P 500 returned 28.7%. We can’t predict the future, but we can plan for it. Throughout any period in history, investors have had to endure a constant barrage of concerning news and because of this, investors who maintained their commitment were rewarded. We often think that intelligence and activity would be common traits of successful investors; instead, patience and commitment are what really drive success.

In times of instability, it is essential to assess whether markets are functioning properly. Right now, markets are behaving as we would expect them to—they are open, trades are executing, buyers and sellers are coming together and setting prices. The world has seen many crises during my more than 50 years studying markets, which has taught me that uncertainty and volatility are part of investing. Time and again, markets have rewarded investors willing to focus on their goals and stick to their long-term plan.

— David Booth, Executive Chairman and Founder of DFA

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