We continue to see this war rage on, taking the inevitable, somewhat random, and horrible path that wars always do. But, because we're advisors, we want to take a step back and illustrate how being "in the market" and being diversified is very important, even (and especially) during volatile times. These are precisely the times when investors "earn" their good returns for being patient, diversified, and having a well structured strategy that is implemented without emotional hinderances. We can illustrate with a few stories, first about remaining invested.
I was meeting with a few investment managers that we regularly use to help structure and implement investment decisions. When we started the meeting at 9:30 AM, the S&P 500 index was down about 1%. During the meeting, we were discussing risks in the stock market and how the market has become very sensitive to news, both bad and good. This is common when there are more unknowns out there than the relative calm that the market enjoys. There's a common saying of "the markets hate uncertainty", meaning that stocks generally perform poorly when there are events going on that may affect the ability of companies and people to earn money or make profits in the future. We like to help our clients keep in mind that staying in the market is the best approach to making a good return because of this uncertainty, not despite it. Fast forward to about 10:15 AM in our meeting. The S&P went from being down 1% to being up about 3%. This is a 4% swing in about 30 to 40 minutes - a massive swing to be sure. The S&P ended up slightly down that day as well, which took participants on a wild, 7% round trip - then they went on to gain another 3% the next day.
The story above is a microcosm of a greater lesson: we never really know when the markets are going to turn because it is almost impossible to predict what events will transpire and exactly when. Missing the good news can be just as harmful to your portfolio as missing the bad news. Take a look at the chart below from Dimensional. It shows how impactful being out of the market on the best days in the market can be on long-term returns. They illustrate how the growth of $1,000 would be on your ultimate return over 30 years.
It's clear to see that even missing a single best day can reduce the portfolio's long-term value by a whopping 10%. Best to hang in there.
Transitional Times
The great Bob Dylan said it best in The Times They Are A-Changin':
Come gather round people, wherever you roam
And admit that the waters around you have grown
And accept it that soon you'll be drenched to the bone
From time to time, the markets (really just a group of participants, both human and robotic) take a while to accept the reality surrounding them. Prices tend to become volatile and swing wildly when people, countries, and economies experience transition. Think of the transition we encountered during the onset of the pandemic in the US. Markets became quite volatile. We're now experiencing the transition from relatively low inflation to a period where we may see price inflation. Being diversified helps, but you're still going to get "drenched to the bone" at some point or another. The point of diversifying your investments is to not sink below the waterline and drown. Investors that pile into one security either do very well, or, most of the time, drown. As an investor, recovering from drowning can take a lifetime and we don't suggest trying it with any significant amount of your portfolio. This is why we usually advise limiting high-flyer risks to no more than 2.5% to 5% of a client's portfolio at any given time.
Here's a story I heard on the radio that illustrates how being diversified can help:
A Ukranian man, who happened to be an economist and with parents living in Russia, understood that an attack was likely imminent. He advised his parents to diversify out of the Russian currency (the ruble) and into assets that could hold value during a big "transitional time". He wisely advised his parents to use their cash to buy things like washing machines, toasters, iPhones, medications, etc. Then the Russian ruble sank 40% over a few weeks. The toaster holds more value now than before.
Let me make one thing clear: while we do not advise taking cash and buying toasters, we do strongly advise diversification. The above story is just an illustration as to why holding different assets can be important. More relevant to investors in the US; think of how the seemingly unstoppable tech stock sector seemed just a few short months ago. They've been handily beaten by a margin of around 60% by energy stocks over the same period. That's the power of diversification.
The best anyone can do is maintain a diversified portfolio, and adjust based on the best available information at our disposal.
Be well and please contact us if we can help you or any friends or family.
