The stock market's performance this year has once again taught us the most important lesson to keep your retirement investments on track for long-term success. Despite all of the speculation and commentary we've seen on financial matters this year, one piece of wisdom has been as relevant as ever.
The stock market is never quite as simple as it seems
Your retirement-investment strategy should reflect prevailing long-term trends in the stock market and the broader economy. It's tempting to react to the news of the day. Major events, such as depressions, monetary shocks, or sector crashes can deeply impact businesses and the market in general. However, the overall picture is a lot more complicated, especially over the long term.
The global economy is complex, which makes it difficult to know how your retirement account will react to any event. This year alone, we've had to deal with serious risks including high interest rates, a banking crisis, Federal debt-ceiling concerns, inflation, serious geopolitical conflicts, a jumbled set of economic indicators, and the constant threat of recession. It's been a fairly overwhelming parade of headwinds that all seem quite serious. Despite all of that, the S&P 500 has risen roughly 20% so far this year.

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This perfectly illustrates the issues with simplified, event-driven retirement investments. The stock market doesn't necessarily reflect the current situation in the economy. Instead, the market moves as investor expectations for the future change. There's been a large volume of bad or threatening news this year. Last year's market decline suggests that investors had already priced significant bad news into their valuations. Investors are also fixated on the Federal Reserve's monetary policy right now, and sometimes shifting expectations for Fed policy can completely overshadow any other economic news.
People should avoid major strategic changes based on the news, because there are always numerous factors at play. If a recession looks likely, it seems natural that you shouldn't have much risk on the table. If the economy is growing, then you could miss out by investing too conservatively. Unfortunately, it's not that simple. As shown above, that news might already be assumed in stock prices, or there might be secondary factors that are even more important to investors. We see this in action all the time when companies report quarterly earnings. The stocks often move based on outlook more than on reported performance relative to expectations.
Don't talk yourself into abandoning your long-term investment strategy by responding to short-term drivers even if they seem obvious. Instead of trying to time the market, build a portfolio that matches your risk tolerance and time horizon. Maintain this strategy for the long haul, and make modest adjustments over time as circumstances change.
It's rarely as bad (or as good) as it seems
Investors also have to fight against bias that makes us overestimate the importance of today's news. We shouldn't minimize the dire impacts that economic shocks can have on individuals and families, but your financial-planning decisions should be made on a rational basis with a long-term view. Years from now, we'll probably realize that many of today's big stories aren't as important on the grander scale in retrospect.
The economy has endured a number of serious threats over the years, including depressions, recessions, and the collapse of various major industries. Likewise, the stock market has endured a series of booms and busts, including the dot-com bubble, the global financial crisis, and the COVID-19 pandemic.
Economic growth rates will rise and fall over time, but the long-term average economic growth rate in the US is predictably in the low-single digits. Anything short of a genuine global catastrophe won't lead to total economic collapse. Likewise, it's important to not get carried away with exciting new technologies and asset classes. Bubbles often inflate and then pop across a hype cycle, but the growth of underlying business fundamentals can't grow too much faster than the broader economy in the long term.
It's good to recognize investment risks and opportunities, but it's not a good idea to let emotions dictate retirement-planning decisions. Media is designed to tap into irrational impulses, and it's tempting to make decisions based on fear and greed. Try to maintain a measured approach and historical perspective, and you'll set yourself up for long-term success in retirement.