Ignore the Headlines, Don’t Overreact
Occasionally the investing world calls into question what have generally been known to be foundational elements of investing. I clearly remember a common message following the financial crisis in 2008, when even owning stocks was called into question. The period from 2000 – 2010 became known as the lost decade in the U.S. stock market as the S&P 500 suffered challenging times with returns of -9.1% in 2000, -11.89%, in 2001, -22.1% in 2002, -37% in 2008, and through the ups and downs of the decade, the total return of the S&P 500 was -9.1% for those 10 years. No doubt, that was a challenging time for U.S. stock market investors, and headlines also questioned the merit of owning stocks, as other assets such as bonds and gold delivered much better returns. Of course, stock market returns since then have been very strong (despite some ups and downs which are part of the price you pay for investing in the stock market), and the S&P 500 has been especially favorable as U.S. Large Cap Growth stocks have dominated the market. Any investors that reduced or eliminated U.S. stocks as part of their portfolio have likely suffered a large opportunity cost in doing so.
Today the message is different but similar. Bonds are now being questioned by many, again asking if they merit a spot in a portfolio. It’s a similar story in the sense that the bond market recently suffered the worst returns in decades due to high inflation and rapidly rising interest rates. Bonds, which are often thought of as a more stable investment, were down 13.01% in 2022 as measured by the Barclays Aggregate Bond index, dragging the 5-year return for bonds down to essentially zero. Once again, headlines such as Should You Still Have Bonds in Your Portfolio ring familiar. Nobody knows what the future return for bonds will be, but it wouldn’t surprise me if returns are better than many expect, partly due to the fact that so many seem ready to abandon them (investor behavior is often contrary to what actually occurs). Situations like these are not uncommon and have happened in many asset classes, whether it be international stocks, small-cap stocks, technology stocks, value stocks, and so on.
It is commonly said not to chase returns, but equally as important is to not run from downturns in the market. In fact, we’re supposed to buy low, sell high, right? The examples discussed indicate many people do just the opposite. Depending on how you view the market you may be tempted to overact to current conditions. It is important to maintain a well-diversified portfolio that is in-line with when and how you plan to use your investments. A price that is paid for diversification is that something in your portfolio likely doesn’t feel like it’s holding up its end of the bargain at any point in time. Well-known investment and Wall Street Journal writer, Jason Zweig, is quoted as saying “if you don’t have something in your portfolio that hurts to own you probably aren’t diversified”.
If you would like help evaluating if your portfolio is structured appropriately for your financial plans, you can email me at advisor@blakegallion.com.
