1. Uncertainty is Unavoidable: Remember that uncertainty is nothing new and investing comes with risks. Consider the events of the last three years alone: a global pandemic, the Russian invasion of Ukraine, spiking inflation, and ongoing recession fears. In other words, it may have seemed as if there were plenty of reasons to panic. Despite these concerns, from March 1, 2020 through February 28, 2023, the Russell 3000 Index (a broad market- capitalization-weighted index of public US companies) returned an annualized 11.79%, slightly outpacing its average annualized returns of 11.65% since inception in January 1979.¹ The past three years certainly make a case for weathering short-term ups and downs and sticking with your plan.
2. Financial Markets are Resilient: Over the past 50 years, there have been three instances where the S&P 500 experienced a 50% decrease in value—January 1973-October 1974, March 2000-October 2002, and October 2007-March 2009. Despite these significant market downturns, American companies have managed to thrive and grow. In the past 50 years, the S&P 500 has increased 35 times and its cash dividend has risen 21 times, surpassing inflation which has only increased seven times. Furthermore, the average annual compound rate of total return (including reinvested dividends) for the S&P 500 was 10.3%, comparable to the hundred-year average, despite having experienced three halvings.
3. Emotions are Volatile: Our emotions can be one of the most volatile elements in investing, partly due to how our brains are wired. First, investors view stock market declines as “losses” instead of temporary setbacks in the long-term upward trend of shareholder capitalism. Second, these “losses” cause them totally self-generated “pain” that feels twice as bad as advances feel good. Finally—and most weirdly—they think the more the market declines, the greater the risk becomes of an even worse decline.
4. Market Timing is Futile: Inevitably, when events turn bleak and headlines warn of worse to come, some investors’ thoughts turn to market timing. The idea of using short-term strategies to avoid near-term pain without missing out on long-term gains is seductive, but research repeatedly demonstrates that timing strategies are ineffective. The impact of miscalculating your timing strategy can far outweigh the perceived benefits.
5. Stay the Course: The stock market consistently and wildly overdiscounts both positive and negative economic cycles and the fortunes of companies. As we have seen, great companies have a solidly positive long-term upward trend in earnings, dividends, and values. Furthermore, population growth, eco-nomic growth, innovation/productivity, and the law of creative destruction positively influence intrinsic values. Therefore, riding out the cycles and letting market prices migrate back toward fundamental values is best.
6. “Diversification is Your Buddy:” Nobel laureate Merton Miller famously said, “Diversification is your buddy.” Thanks to financial innovations over the last century in the form of mutual funds and later ETFs, most investors can access broadly diversified investment strategies at very low costs. While not all risks—including a systemic risk such as an economic recession—can be diversified away (see Principle 1 above), diversification is still an incredibly effective tool for reducing many risks investors face.

In particular, diversification can reduce the potential pain caused by the poor performance of a single company, industry, or country.² As of February 28, Silicon Valley Bank (SIVB) represented just 0.04% of the Russell 3000, while regional banks represented approximately 1.70%.³ For investors with globally diversified portfolios, exposure to SIVB and other US-based regional banks likely was significantly smaller. If buddying up with diversification is part of your investment plan, headline moments can help drive home the long-term benefits of your approach.

As long-term equity investors, we believe lifetime investment success comes from sticking to a well-conceived plan, while investment failure generally comes from reacting to current events.

The benefits of sticking to a well-conceived plan became even more apparent in the last three years since the pandemic started, which has exemplified the inherent unpredictability of the economy and the market.

The unprecedented worldwide economic and political turmoil has shown us that the economy cannot be consistently forecast, nor the stock market consistently timed.

As a result, we believe that the most reliable way to capture the full return of equities is to stay invested and weather the frequent, but historically temporary, declines that are a normal part of the market's behavior.

These principles continue to form the foundation of our investment policy as we work together towards achieving your long-term financial goals.

Economic and inflationary uncertainty continued in 2022. The central drama of the year—and, it seems likely, for the coming year—was the Federal Reserve's belated, but very aggressive, efforts to bring inflation under control.

The U.S. equity market rose seven times in the nearly 13 years between the trough of the Global Financial Crisis (March 9, 2009) and January 3, 2022. In 2022, the U.S. equity market sold off sharply, and at its most recent trough in October, the S&P 500 was down 27%. Bond prices also declined in response to the sharp increase in interest rates.

It's somewhat ironic that despite the many challenges faced by the mainstream equity market since the onset of the pandemic early in 2020, the S&P 500 managed to close out 2022 somewhat higher than it was at the end of 2019 (3,839 versus 3,231, a gain of nearly 19%). While not outstanding, this performance is comforting given the past three years' economic, financial, political, and geopolitical turmoil.

Our core investment strategy over the past three years of standing fast, ignoring the market noise, and sticking to our long-term plan has been validated by these results, and we believe it remains the best approach for investors.

The question of the hour is whether and to what extent the Fed's inflation-fighting efforts may cause a recession if it hasn't already. Over the coming year, the outcome will likely determine the short-term trend of equity prices. Our position remains that this outcome is uncertain and that a rational investment policy should not be based on an unknowable outcome.

However, we believe that the benefits of bringing inflation under control, which affects everyone in society, will far outweigh any temporary economic pain.

It's important to remember that we are not investing in the macroeconomy. Instead, we are investing in the ownership of enduringly successful companies poised to meet the needs of a growing (eight-billion-person) global population. We have confidence in the companies that make up our portfolios.

Accurately predicting the future is a nearly impossible feat in the ever-changing world of finance. With hindsight, it's easy to fall into the trap of thinking we could have made better investment decisions if only we had acted on our instincts. For most investors, including you and me, such thinking is nothing more than wishful dreaming.

It is human nature to remember events through a distorted lens. We may truly believe we would have made better investment decisions if we had acted on our instincts. However, an experiment by Jason Zweig of The Wall Street Journal showed that respondents to his 2022 prediction survey “remembered being much less bullish than they had been in real-time." This illustrates that basing bold investment decisions on emotions or current market conditions is not a reliable approach to maximizing future investment returns.

In their best-selling book, "Thinking Fast and Slow," Daniel Kahneman and Amos Tversky highlight how peoples' instinctual ability to interpret statistical data and forecast trends tends to be influenced by inherent biases and overconfidence. This can lead to a false sense of having insider knowledge and the ability to predict trends accurately. In their book, the authors propose a decision-making process called reference class forecasting that uses probabilities of past similar events and assumes the future will likely follow historical averages. By adopting a similar approach, we seek to develop a sound investment strategy for each client that considers historical probabilities of markets and invests based on long-term averages instead of biased interpretations of current market conditions.

A durable, globally diversified mix of stocks and bonds is still our best strategy in bull and bear markets. We’ve built your portfolio on the assumption that markets are durable over the years but can be volatile in the short term. We encourage you to recall the process you have followed to develop your personal asset allocation.

In addition, we can recall a few bear market actions worth considering at this time, such as:

• Stick with your well-planned portfolio mix and reallocate when appropriate to meet your personal financial goals.

• Periodically rebalance your account to stay on target.

• Avoid market timing because, as the recent analysis by Morningstar’s John Rekenthaler reinforces, trading on market forecasts does not reliably improve your end returns.

• Tax-loss harvest in your taxable accounts to reduce your tax bill.

• Adding to your investment portfolio while prices are low (especially if you have a long time to invest) can significantly increase your long-term returns.

• Take a close look at your discretionary spending (especially if you’re in early retirement).

• While markets may feel random, remember that the relentless wheels of global commerce drive market returns:

“Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See’s peanut brittle.”

— Berkshire Hathaway Chairman Warren Buffett

• Capturing the long-term returns of markets takes time in the market, not market timing. As the 61-year-old Warren Buffett observed 30 years ago:

“Our stay-put behavior reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient.”

— 1991 Berkshire Hathaway Shareholders Letter

• Being patient and preferring decades-long investment commitments has worked wonders for Buffett. You could do worse than to emulate someone who has been investing for 70-some years and has long been among the wealthiest people on the planet.

“Productive assets such as farms, real estate, and, yes, business ownership produce wealth – lots of it… All that’s required is the passage of time, an inner calm, ample diversification, and a minimization of transactions and fees.”

— 2020 Berkshire Hathaway Shareholders Letter

1. There is No Precise Definition of a Recession.

Most of us know what a recession feels like, but there is no clear definition for a recession or how it might affect us. In the U.S., the National Bureau of Economic Research (NBER) defines a recession as follows (emphasis ours): “A recession is a significant decline in economic activity that is spread across the economy, and that lasts for more than a few months.” Similarly, the World Bank Group has said, “Despite the interest in global recessions, the term does not have a widely accepted definition.”^[i]

2. Economists Usually Can’t Spot a Recession Except in Hindsight.

No single signal tells us exactly when a recession is underway or over. Instead, recessions can trigger or be triggered by many conditions, including declining Gross Domestic Product (GDP), rising unemployment, sinking consumer confidence, gloomy retail forecasts, disappointing corporate balance sheets, a bond yield curve inversion, and stock market declines.

Furthermore, a widespread downturn must linger for a while before it qualifies as a recession, and the NBER declares one only after it’s underway. For example, in July 2020, the NBER announced we’d been in a recession for two months between February–April 2020. This was triggered by the abrupt arrival of the global pandemic. It was the shortest U.S. recession to date and already over by the time the NBER officially acknowledged it.^[ii]

3. Sometimes, The Economy Gets Stuck for a While.

Recessions can become a self-fulfilling prophecy. As Nobel Laureate and Yale economist, Robert Shiller describes, “The fear can lead to the actuality.”^[iii] For example, one economic mishap feeds another until the economy feels gridlocked. It may take a while before improved conditions, a more upbeat attitude, or a blend of both help the economy move forward. When this occurs, a recession and its related financial fallout may last longer than the underlying economics suggest.

4. Recessions are Inevitable.

It is never fun to be in a recession, but it helps to recognize they are part of natural economic cycles. While they may not be anyone’s favorite tool for the job, they can sometimes help rein in runaway spending, earnings, and pricing for companies, consumers, and creditors alike.

As mentioned above, the Federal Reserve may facilitate a recession through tighter monetary policy and interest rate increases to prevent rising inflation. If we can avoid a recession, all the better. But if it takes a recession to reduce inflation, it is a necessary evil. Let’s hope it is a modest recession.

5. Experience Helps.

New investors have little perspective to help them realize recessions and market downturns won’t last forever. It’s b

een more than a decade since the Great Recession and more than 40 years since the U.S. last experienced steep inflation. Many investors have had little first-hand experience managing such turbulent times. As we gain investment experience, we learn to temper our expectations and seek support from an investment advisor.

It may help to acknowledge we’ve been here before. The table (to the right) lists nearly three dozen distinct U.S. recessions dating back to the 1850s, with an average length of 17 months.^[iv] Some were considerably longer. We endured a series of years-long recessions during the era of the Civil War in the mid-to-late-1800s. Then there was the Great Depression from 1929–1939.

6. The Stock Market is Forward Looking.

While economists may not call a recession until after the fact, stock market participants are continuously making investments based on their predictions about the future state of the economy. If you’re worried, other investors are too, and that uncertainty is reflected in stock prices. The chart below shows that the U.S. stock market tends to fall in advance of recessions and starts rebounding earlier than the economy.^[v]

7. A Recession is Not a Signal to Sell.

It also helps to remember: Every recession has eventually ended, with economies and markets thriving after that.

The chart below shows us that the U.S. stock market has averaged positive returns over one-, three- and five-year periods after significant declines dating back to July 1926.

While a recession does not accompany every bear market, the one-year average cumulative return of the S&P 500 after falling into bear market territory (a 20% decline from its previous peak) was about 20%—the five-year average cumulative return was over 70%.^[vi]

8. Time the Market at Your Own Peril.

When you start to think, “I’ll sit out until things get a bit better,” consider these words of wisdom from one of the most experienced investors of all, Warren Buffett (emphasis ours):^[vii]

“Periodic setbacks will occur, yes, but investors and [business] managers are in a game that is heavily stacked in their favor. Since the basic game is so favorable, Charlie [Munger] and I believe it’s a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of ‘experts,’ or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it.”

As the chart below shows, big return days are hard to predict, and you don't want to miss them. If you continuously invested $1,000 in the S&P 500 from the beginning of 1990 through the end of 2021, you would have $26,322. However, if you missed the S&P 500’s single best day, you’d only have $23,590—and only $16,625 if you missed the best five days.^[viii]

9. You Can’t Change the Economy, But You Can Change Yourself.

When the economy is in a funk, it doesn’t matter whether it’s due to recessions, bear markets, and other external events. Only one person can change your financial wellbeing: yourself.

Life is filled with causes and effects over which we have no control, especially concerning our investments. And yet, there are many small but mighty acts we can take to contribute to the positive outcomes we wish to see in our homes, our nation, and the world. We can manage our household budgets. We can show up for work (or perhaps volunteer in retirement). We can be loving family members, engaged citizens, and generous donors to the causes we hold dear.

And we can invest wisely. This means taking charge of your wealth by focusing on the drivers you can control and ignoring the greater forces you can’t. For example:

• We can’t avoid recessions. But we can channel our inner Warren Buffett to look past today’s risks and retain an appropriate amount of market exposure to pursue our long-term financial goals.
• We can’t avoid bear markets. But we can avoid generating unnecessary losses by panicking and selling low in the middle of one.
• We can’t avoid inflation. But we can set up a thoughtful budget to track our income and spending, with a plan in place for making adjustments as warranted.

Last and hardly least: It’s tough to change the world. But you can change yourself. Sometimes all it takes is a shift in sentiment to seize your next best move.

10. It May Be a Good Time to Revisit Your Long-Term Investment Plan.

The flood of money pushed into the system to keep the economy afloat during the pandemic also opened the door for many exotic investment ideas to hit the market. Were you tempted by meme stocks, cryptocurrencies, or a hot new IPO? If so, it may be a good time to revisit your long-term investment plan.

About half of the investable market open to public equity investors is outside of the U.S. If your portfolio is all in U.S. stocks, you are missing 50% of the investment opportunities available. You may consider starting your investment process with a market-cap-weighted global portfolio instead of chasing market segments that have outperformed in the past few years.

Furthermore, building your portfolio using institutional-quality asset class funds can help you quickly diversify across companies of various sizes and underlying fundamentals. Using funds that target specific asset classes can help you easily reduce your exposure to market segments that have become overvalued and reinvest in other parts that may be undervalued. Periodic rebalancing can help capture a balanced market return over the long run.

Beyond a well-designed portfolio, an appropriate asset allocation between stocks and bonds can help you ride out market downturns. As we mentioned above, one of the most significant risks for an individual equity investor is to get scared and sell their stocks near a market low.

An investment advisor can help you develop a plan considering volatile markets and disappointing returns. Then, they can help you stick to your plan and get to the other side when the storm comes. A sound approach to investing for you may include a written investment plan, a well-designed portfolio, and a financial advisor.

Most people intuitively understand that it would be desirable to sell stocks before a decline and repurchase them before the price increases. Unfortunately, this is notoriously difficult.

Someone is always predicting a recession is imminent, whether in the next three months or three years. It is possible that they may be right this time. However, no one has been shown to be consistently correct in predicting recessions.

As measured by the S&P 500, predicting the stock market’s price is even more difficult because the stock market has not been shown to be closely correlated with the blips in the U.S. economy—meaning the stock market does not go up and down in tandem with a recession. The stock market tends to be forward-looking and discounts the chances of a recession well before a recession begins and bottoms out and increases in value much sooner than a recession ends. Since 1945, every recession has prompted a bear market, but not all bear markets were followed by a recession.^[vi]

The table below is a chart detailing the beginning date, ending date, and the total decline of every bear market in the S&P 500 since 1960.^[vii] The chart is a frightening sight for investors. However, it is essential to remember that on the first trading day of 1960, the S&P 500 traded at 60. On the last trading day of April 2022, the S&P 500 closed at 4,132.^[viii]

Investors should find solace that from 1960 until April 30, 2022, the average annual compound rate of return of a 60/40 portfolio invested 60% in the S&P 500 and 40% in One-Month U.S. Treasury Bills was 8.13%.^[ix] The return of a 60/40 portfolio during this period is slightly higher than the long-term (96-year) average of 7.85% of a similarly constituted 60/40 portfolio.

The S&P 500 is significantly more volatile than a 60/40 portfolio, but someone invested in the S&P 500 from January 1960 to April 2022 would have earned 10.23%. The average return of the S&P 500 over the past 96 years has been 10.27%. While it is exceedingly difficult to time a bear market, it turns out you would not have needed to time the market to have a successful investment experience during these periods.

What Is Evidence-Based Investing?

Evidence-based investors build and manage their portfolios based on what is expected to enhance future returns and dampen related risk exposures, according to the most robust evidence available. This also means sticking with your evidence-based strategy once it’s in place for the long term, regardless of market uncertainties and self-doubts you’ll experience along the way.

 

Do you (1) hope investors can come out ahead by finding mispriced stocks, bonds, and other trading opportunities; and by dodging in and out of rising and falling markets?

Or do you (2) accept all investors' investment insights create relatively efficient market pricing that is too random to predict consistently?

An overwhelming body of evidence suggests investors should skip the first approach and adopt the second assumption. This has been the case since at least 1952 when Harry Markowitz published Portfolio Selection in The Journal of Finance. In their book, “In Pursuit of the Perfect Portfolio,” Professors Andrew Lo and Stephen Foerster describe:

“While it’s commonplace now to think of creating a diversified portfolio rather than investing in a collection of securities that each on their own look promising, that wasn’t always the case. It was Harry Markowitz who provided a theory and a process to the notion of diversification. He helped to create the industry of portfolio management.”

Markowitz’s work became known as Modern Portfolio Theory (MPT), academics and practitioners have been building on it ever since. His initial work and others’ subsequent findings strongly support ignoring all the near-term noise and taking a long-view approach. This involves creating a unified investment portfolio and focusing on more manageable details, such as:

• Tilting toward or away from entire asset classes to tailor your risks and expected returns
• Minimizing avoidable risks by diversifying globally
• Reducing unnecessary costs
• Controlling your own damaging behavioral biases

At first blush, nearly every investment recommendation may seem “evidence-based.” After all, few forecasters peer into actual crystal balls to make their predictions. And no market guru would admit their stock-picking track record has been no better than a dart-throwing monkey’s (even though that’s usually the case).

Instead, stock-picking and market-timing enthusiasts tend to argue their cases by turning to articulate analyses, clever charts, and convincing investment briefs. They use these props to explain the late-breaking news and recommend what you should supposedly be doing about it.

There’s nothing wrong with facts and figures. The critical difference is how we apply them as evidence-based investors. As financial author Larry Swedroe describes it:

“In investing, there is a major difference between information and knowledge. Information is a fact, data, or an opinion held by someone. Knowledge, on the other hand, is information that is of value.”

— Larry Swedroe, ETF.com

No matter how compelling a call to action may be, we discourage frequent reactions to the never-ending onslaught of information. Before acting, we must ask ourselves:

Which current information might add substantive value to our decisions by refuting or adding to the existing evidence? Or is this “new” information just more of the same old noise, already factored into our evidence-based investment strategy?

Because there is much more noise than valuable knowledge available to investors, the basic recipe for evidence-based investing begins with academic rigor. It should always be a key ingredient in separating likely fact from probable fiction:

• It requires robust data sets that are large enough, representative enough, and free from other typical data analysis flaws.
• Authors should be impartial, lacking incentives to “torture” the data to make a point.
• Other studies should be able to reproduce the same findings under different scenarios, suggesting the results are more likely to persist upon discovery.
• The data, method, and results should be published in reputable, peer-reviewed forums where informed colleagues can comment on the findings.
• Enough time must pass to make all the above possible.

 

After that, we also must be able to apply the results in the real world. In other words, even if a theoretical strategy is expected to enhance your returns, it must do so after considering all practical costs and portfolio-wide tradeoffs involved. For example, sometimes, one source of expected returns may offset another, even more significant, source. Occasionally, we can combine them for even stronger results; other times, it’s best to favor one over the other.

So, which factors appear to explain different outcomes among different portfolios best? What combinations of these factors are expected to create the strongest, risk-adjusted portfolios? What explains each factor’s return-generating powers, and can we expect those powers to persist?

Academic research has found several factors that point to differences in expected returns. Analytical scholars have thoroughly documented the differences in expected returns generated by the various factors in markets around the world and across different time periods.

Based on the academic answers to the practical questions posed above, we typically mix and match the following factors in our evidence-based portfolios, varying specific exposures based on each investor’s personal goals and risk tolerances:

• The Market: Stocks (equities) vs. bonds (fixed income)
• Company Size: Small vs. large company stocks
• Relative Price: Value vs. growth company stocks
• Profitability: High-profit vs. low-profit company stocks
• Term: Long-term vs. short-term bonds (based on maturity date)
• Credit: “Safer” vs. “riskier” bonds (based on credit quality)

 

Events	Tax-Planning Possibilities
You get a job.	Enroll in and max out contributions to any tax-sheltered accounts such as a 401(k) or Health Savings Account (HSA).
You buy a home and start a family.	Score extra tax deductions; use the savings to pay down college debt, contribute to an IRA, or establish a 529 plan account for your child.
You receive an executive compensation package.	Work with a financial planner or tax professional to determine how and when to exercise your options for maximum tax efficiency.
You receive a financial windfall, such as an inheritance.	Allocate a significant portion of any new wealth to tax-sheltered retirement accounts. (Ditto for those executive compensation benefits.) Seek to offset taxable gains with any available losses.
You sell your first home and buy a bigger one.	Keep an eye on any gains from the sale. With some caveats, the Taxpayer Relief Act of 1997 says you can exclude up to $500,000 of the gain as a joint filer ($250,000 for single filers).
You transition to a new, lower-paying career, take a leave of absence from work or incur a financial setback.	If your annual income is taking a temporary hit, consider leveraging the lower tax bracket to reduce your lifetime taxes by harvesting capital gains or performing a Roth conversion.
You buy a business.	Engage a tax-wise professional financial planner to facilitate the acquisition.
You send your 18-year-old to college.	Time to tap their tax-sheltered 529 plan. Adjusting your income levels through practical tax planning may also help secure a more favorable student aid package.
Your 18-year-old decides against college after all.	Consider redirecting their 529 savings to a different beneficiary or withdrawing the assets and paying tax + 10% penalty (which may not be so bad if the assets have grown tax-free for years).
You sell a business.	Ideally, your succession plan has been in place for years before positioning your business for a tax-efficient transfer. Targeted insurance may also help cover taxes without placing an undue burden on you, your partners, or successors.
You retire.	Plan how and when to take Social Security and any pension benefits available, as well as how and when to tap your taxable and tax-sheltered accounts. Once again, during low-income years, you may also plan to engage in some tax-gain harvesting to reduce your overall tax basis.
You downsize to a smaller home.	Again, mind your capital gains, as described above. If you’ve lived in the home for at least two years, you should be able to exclude gains of up to $250,000/$500,000 per single/joint filer.
You decide to work part-time in retirement.	Good for you! But do some tax projections to determine how the extra income may impact your tax rates, benefits, and bottom line.
You are charitably inclined.	Even with the 2017 Tax Cuts and Jobs Act tax code changes, tax breaks remain for the philanthropically minded. For example, you can use well-timed giving to offset unusual taxable events, such as setting up a Donor-Advised Fund in the same year you exercise a taxable stock option, sell a highly appreciated asset, or incur other significant deductible expenses.
You incur high healthcare costs.	Speaking of deductible expenses, you may be able to bundle high-priced elective procedures into a single year to take more than your standard deduction that year (especially if you pair it with bundled charitable giving). Or, if you’re not seeking a higher deduction, this may be an excellent time to tap tax-free assets in your HSA.
You prepare to pass your wealth on to heirs or other beneficiaries.	The taxable implications of estate planning are extensive and best addressed with a financial planner and estate planning attorney. Especially since the 2020 SECURE Act eliminated the stretch IRA, you may also want to assess whether you’d rather prioritize reducing your own lifetime taxes or those of your heirs and proceed accordingly.

If higher inflation does materialize, will it arrive sooner or later? Will it be moderate or severe? Brief or prolonged? Forecasts vary widely because we often forget the academic evidence that informs us: Even excellent explanatory models rarely serve as effective predictive models.

For example, scientists can readily explain why earthquakes occur, but our ability to forecast times, locations, and severities is shaky at best. The same can be said for inflation. We can explain its intricacies, but accurate predictions remain as elusive as ever. There are simply too many variables: COVID-19, climate change, political action, the Federal Reserve, other central banks, consumer banks/lenders, consumers/borrowers, employers/producers, employees, investors (“the market”), sectors (such as real estate, commodities, and gold), the U.S. dollar, global currency, cryptocurrency, financial economists, the media, the world, time … and YOU.

Each of these could throw off any predictions about the time, degree, and extent of future inflation. Besides, as an investor, you only have control over the last two: You and your time in the market. What will you do with your time?

It makes sense: Some investments seem to shine when inflation is on the rise. Others deliver their best results at other times. Because we never know precisely when inflation might rise or fall, we believe an investor’s best course is to diversify into and across various investments that tend to respond differently under different economic conditions.

For example, until earlier this year, value stocks had been underperforming growth stocks for quite a while. You may have been tempted to give up on them during their decade-plus lull (during which inflation remained relatively low). And yet, when inflation is high or rising, value stocks have tended to outperform growth, as has been the case year-to-date.

Another example is Treasury Inflation-Protected Securities (TIPS) versus “regular” Treasury bonds. Neither is ideal across all conditions. But if you hold some of both, they can complement each other over time and across various inflationary rates.

In short, if you’ve not yet done so, it’s time to define your financial goals and build your personalized, globally diversified portfolio to complement them. If you’ve already completed these steps, you should be positioned as best you can to manage higher inflation over time, which means your best next step is most likely to stay put. This brings us to our next point.

Provided time is on your side; the stock market is your greatest ally against inflation.

Over time, global stock market returns have dramatically outpaced inflation. For example, as reported by Dimensional Fund Advisors, $1 invested in the S&P 500 Index from 1926–2017 would have grown to $533 worth of purchasing power by the end of 2017, after adjusting for inflation. Had that same dollar been held in “safe” one-month Treasury bills over the same period, it would have grown to an inflation-adjusted $1.51.

That T-bill growth is more than nothing and welcome relief during bear markets. That’s one reason we advocate for keeping an appropriate mix between wealth-accumulating and wealth-preserving investments. But what’s “appropriate”? It depends on your personal financial goals. The point is, as long as you have enough time to let your stock allocations ride through the downturns, you can expect them to remain well ahead of inflation simply by being in the market.

It’s important to add; no fancy market-timing moves are required or desired when participating in the stock market. Moving holdings in and out at seemingly opportune times is more likely to detract from the vital, inflation-busting role stocks play in your portfolio. In the words of Nobel Laureate Eugene Fama: “The nature of the stock market is you get a lot of the return in very short periods of time. So, you basically don’t want to be out for short periods of time, where you may actually be missing a good part of the return.”

So far, so good. But not all your wealth is for spending in the far-off future. What if you depend on your portfolio to supply a reliable income stream here and now? If you’re retired (or you have other upcoming spending needs such as college costs), eventual expected returns offer little comfort when current inflation is eating into today’s spending needs.

Again, you can’t control inflation, but you can manage your own best interests in the face of it.

Along with a globally diversified investment portfolio, you’ll want a solid strategy for investing for and spending in retirement. For example:

• Asset Location: Among your taxable and tax-favored accounts, where will you locate your stocks, bonds, and other assets for tax-efficiently accumulating and spending your wealth?
• Spending: How much can you safely withdraw from your investment portfolio to supplement your other income sources (such as Social Security)?
• Withdrawal Strategies: Which accounts will you tap first and then next?

Especially when inflation is on the rise, it’s worth revisiting your existing investment and withdrawal strategies. What are the odds your current portfolio won’t deliver as hoped for? We typically use odds-based “Monte Carlo” simulations to ask this critical question and guide any sensible adjustments the answers may warrant.

What if inflation is taking too big a bite? A common misstep is to abandon your carefully structured investments in pursuit of short-cuts. For example, it may be tempting to unload high-quality bonds and pile into gold, dividend stocks, or other ways to seek spendable income. Unfortunately, we believe such substitutes detract from effective retirement planning. The goal is to optimize expected returns and manage unnecessary risks in pursuit of a dependable outcome. As such, we suggest avoiding dubious detours along the way.

What can you do instead? In “Your Complete Guide to a Successful and Secure Retirement,” authors Larry Swedroe and Kevin Grogan describe how to prepare an honest “Plan B.” If a worst-case scenario is realized, you’re then better positioned to make any tough decisions required to recover your footing. The authors explain:

“Plan B should list the actions to be taken if financial assets drop below a predetermined level. Those actions might include remaining in, or returning to, the workforce, reducing current spending, reducing the financial goal, and selling a home or moving to a location with a lower cost of living.”

These sorts of belt-tightening choices are never fun. But you should prefer them over chasing unsubstantiated sources of return that could dig your risk hole even deeper.