INDUSTRY INSIGHT
YOUR FINANCES
SPONSORED CONTENT
THIS TIME IS ( NO ) DIFFERENT
Making short term investment decisions based on the belief “ this time is different ” can be a costly mistake . A recent study shows the following :
If you were fully invested into the S & P 500 index from January 2002 through January 2022 , your annualized rate of return would have been 9.4 %. If you missed 10 of the best days during this time your annualized rate of return would have been reduced to 5.21 %. If you missed 20 of the best days during this time , your return would have been reduced to 2.51 % annually . And if you had missed 30 of the best days during this time , your return would have been only . 32 % annually *.
With Russia and Ukraine at war , the Fed ’ s interest rate hikes , and rampant inflation , it ’ s understandable why one might think “ this time is different ”. The S & P 500 has dropped 20 % from its recent market high - the classic definition of a “ bear market ”.
Fear and nervousness abound , as many economists believe this bear market may be the precursor of recession . The risk of recession may rise as inflation cuts into consumer spending and the federal reserve keeps raising rates in hopes of containing the problem .
In a diversified portfolio , assets should be non-correlated . Unfortunately , this time around both stocks and high-quality bonds have gone down in value . In the absence of cash this has created a challenge in taking withdrawals from a diversified portfolio .
This does not negate the fact that US government bonds , government paper , and quality corporate bonds still provide a kind of safety net since they have never gone down as much as stocks . Stocks have always been more volatile by their very nature when compared to bonds . It ’ s riskier to own ( stocks ) versus loan ( bonds ).
That said , recessions can be painful , but they don ’ t last forever , and they are not inevitable . Long-term investors with a financial plan based on their financial goals in a well-diversified portfolio should always stay the course through good times and bad . A diversified portfolio should include stocks , bonds , and cash .
A savvy investor should always look ahead to determine their cash needs . When the market is up , the necessary cash should be raised to cover future expenses for at least one year or possibly two years based on the risk threshold . Looking at history , this should buy ample time to get through most down cycles without having to sell equities at a loss .
Alternatively , cash can be raised by selling bonds during a downcycle . This is why many people maintain a balanced portfolio consisting of about 60 % in equity and 40 % in fixed income . Even though bonds are down this year , higher quality bonds are not down nearly as much as stocks .
Over the last 100 years , history has recorded peaks and valleys , bull markets , bear markets , corrections , and recessions , but the long-term trend has always been upward . In fact , the market is up 70 % of the time and rewards the long-term investor .
It ’ s really a simple formula : easier said than done , but if you don ’ t sell , you don ’ t lose . Sometimes , it ’ s darkest before the dawn .
Is this time different then ? No one knows . No one has a crystal ball , but based on history , I am willing to bet this time will not be much different than periods in the past .
Anecdotally , I distinctly remember running out of gas waiting in line at a gas station outside of Dallas , Texas in 1978 . Inflation was in the double digits . Interest rates were on the rise . Sound familiar ?
This time is no different . Stay cool , stay calm , stay invested ….
* Factset . Returns are based on the S & P 500 total return index . Past performance is not indicative of future returns . An individual cannot invest directly into an index . Data as of January 31 , 2022 .
This Industry Insight was written by Garrett S . Hoge .
Garrett S . Hoge , CFP ®, ChFC ®, MS of H Financial Management , is a private wealth manager based in Southpointe serving the ever-changing financial needs of his clients . Please contact Garrett at H Financial Management , 400 Southpointe Blvd ., # 420 , Canonsburg , PA 15317 , Phone : 724.745.9406 Email : garrett @ hfinancial . net , or via the Web : hfinancialmanagement . com
Securities offered through Triad Advisors , LLC , Member FINRA / SIPC • Advisory Services offered through H Financial Management .
H Financial Management is not affiliated with Triad Advisors , LLC .
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