“The farther backward you can look, the farther forward you can see.” - Winston Churchill
Recently, our team has spent a lot of time with clients discussing whether they should stay invested during a time of such market volatility. As part of our response, I recorded a video to share the perspective of a 40-year industry veteran who has seen this play out before. Several times. Even though our portfolios are currently under attack, this is a war we can win with the right strategy – and mindset.
Of course, a case can be made for taking the 5.5% return on cash now available. But cash doesn't grow in value; in fact, high inflation can greatly impact its purchasing power over time. When you cash out at a time when the market drops, it essentially means you bought high and are selling low. That’s an investment strategy that could disrupt the thoughtful, well-laid-out plan you have worked hard to construct. Big mistake.
One of my longest standing client relationships of more than 30 years has always been a good client sentiment indicator for me. During the great recession of 2007-2008, he wanted to sell everything. This was a period of all-out war on the stock market. The S&P 500 declined by more than 50% from its peak on October 7, 2007, through the bottom on March 9, 2009. Still, we didn’t sell. First off, we couldn’t justify him paying the capital gains tax on the sale of his assets.
Even after a bad first quarter, stocks still achieved a 27% gain in 2009¹. The stock market recovery was historic. In fact, if you invested $100 in the S&P 500 at the beginning of 2007, you would have about $430.12 by this time in 2023, assuming you reinvested all dividends. This is a return on investment of 330.12%, or 9.24% per year². Large stalwart companies that make up the S&P tend to figure it out.
You also don’t want to interrupt the power of compounding. Compound interest, the process of earning ‘interest on interest’, truly works its magic when given sufficient time. Charlie Munger, Vice Chairman of Berkshire Hathaway and long-time partner of Warren Buffet has made compounding an integral part of his investment strategy. It has become the engine that powers Berkshire’s long-term investment success.
If there is action to be taken, rather than cash out, it might make more sense to consider rebalancing your holdings. The client I described earlier wanted to get out of the market again during his generation’s second ‘World War’ on portfolios - the COVID pandemic. Once more, we kept our position. Although we did sell some of his IRA holdings, we kept his personal portfolio intact. That proved to be the right call again.
Let’s face it, Americans are not super happy right now, with the economy or anything that has to do with leadership. Here’s my own laundry list of concerns:
- What do you think happens to the market if former President Donald Trump is prevented from running for re-election?
- What do you think happens if we get dragged into a war in the Middle East?
- What do you think happens if inflation gets worse?
- What do you think happens if we go into a recession?
Indeed, the pressure to sell yet again in the face of these fears is effectively World War Three for our generation.
So as investors look for their advisors to lead, my inner Churchill knows that retreat is not an option now. Taking your money out of a long-term equity strategy is risky. It requires two impeccably good—and highly improbable—decisions: 1) get out at exactly the right time, and 2) get back in at exactly the right time. It is important to remember that the stock market melts up, not down. It rises for a longer period than when it goes down.
Moreover, the stock market has a reputation for rallying during times of social turmoil, and this might not be different. The S&P 500 rallied throughout the George Floyd protests – up 38% to date. Again large, dominant companies (not all, but most) can grow in spite of the headwinds.
Legendary investor, mutual fund manager, author and philanthropist, Peter Lynch, said it perfectly:“The real key to making money in stocks is not to get scared out of them.” History has shown that if you miss the best 10 days in the market, it will cut your returns dramatically and you will feel its impact for years to come. Attempting to time the market introduces significant risk of missing those days.
I have a money manager friend who is very passionate about this topic. His experience has been that goal-focused, planning driven investors reach their goals. In contrast, performance-chasing, reactive investors do not.
So, what is the best ‘wartime in the stock market’ strategy for your investments? First and foremost, keep your fears in check. By holding firm, you may find even greater opportunities for dollar cost averaging. The stocks you have been watching will likely be on sale. It’s also a great time to review the diversification of your portfolio. Don’t panic. Historically, bear markets in the U.S. occur, on average, every 4.5 to 5 years. Experienced investors have been here before.
When this too has passed, we will again move forward. Perhaps as the new ‘greatest generation’ of investors.
Thanks for reading,
¹ Seeking Alpha January 2, 2023 https://seekingalpha.com/article/4502739-average-stock-market-return
² S&P 500 Data https://www.officialdata.org/us/stocks/s-p-500/2007
This material has been provided for general, informational purposes only, represents only a summary of the topics discussed, and is not suitable for everyone. The information contained herein should not be construed as personalized investment advice or recommendations. Rather, they simply reflect the opinions and views of the author. D. B. Root & Company, LLC. does not provide legal, tax, or accounting advice. Before making decisions with legal, tax, or accounting ramifications, you should consult appropriate professionals for advice that is specific to your situation. There can be no assurance that any particular strategy or investment will prove profitable. This document contains information derived from third party sources. Although we believe these third-party sources to be reliable, we make no representations as to the accuracy or completeness of any information derived from such sources, and take no responsibility therefore. This document contains certain forward-looking statements signaled by words such as "anticipate," "expect", or "believe" that indicate future possibilities. Due to known and unknown risks, other uncertainties and factors, actual results may differ materially from the expectations portrayed in such forward-looking statements. As such, there is no guarantee that the expectations, beliefs, views and opinions expressed in this document will come to pass. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. All investment strategies have the potential for profit or loss. Asset allocation and diversification do not ensure or guarantee better performance and cannot eliminate the risk of investment losses. The impact of the outbreak of COVID-19 on the economy is highly uncertain. Valuations and economic data may change more rapidly and significantly than under standard market conditions. COVID-19 has and will continue based on economic forecasts to have a material impact on the US and global economy for an unknown period.
David B. Root, Jr.