Financially Speaking
TIME, NOT TIMING, IS STILL WHAT MATTERS
This has been a pretty crazy year so far. In May, I went to a four-day financial conference in Boston hosted by Commonwealth Financial Network. There were industry experts from several financial companies offering their insights and wisdom on the economy and markets. There were discussions about the market decline year-to-date and what caused it — COVID-19, inflation, supply-chain issues, the war in Ukraine. Since the Russian invasion of Ukraine, COVID has been a less prominent topic in the news. Thankfully, with mask restrictions lifted in most places it feels normal to travel once again, but COVID is still a factor affecting the supply chain. Just look at China as they close cities like Shanghai, which in turn shuts down factories that make goods sold worldwide.
The Federal Reserve has raised interest rates twice so far, with more to come. Everyone is feeling the pinch, especially at the gas pump and in supermarkets. Instead of focusing on the why, I would like to look at what has happened and what to do.
Year-to-date, the S&P 500 is down more than 18% from its all-time January high with continued concerns of an economic slowdown. The news about market volatility is front and center every day, causing anxiety for most everyone, including the seasoned investor. Keep in mind that the S&P is a measure of only one asset class, U.S. large company stocks. Six companies (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Tesla) account for approximately 25% of the S&P. We loved these six companies when they helped the markets increase over the past several years, but now they are tumbling with the market. If you add in Nvidia Corp and Netflix, Inc., they are responsible for approximately 50% of the S&P losses through May 17, based on a total return basis, according to the S&P Dow Jones Indices as reported by the Wall Street Journal. Most investors have diversified portfolios across all stock classes (large, midsize, and small companies), bonds, and cash to help moderate their portfolio volatility during turbulent times.
Market volatility and corrections are fairly common. Earlier this year, intelligent.schwab.com reported that over a 20-year period from 2002-21, “a decline of at least 10% occurred in 10 out of 20 years, or 50% of the time, with an average pullback of 15%.”
In 2019, Capital Group/American Funds put out an insightful article titled, “Time, not timing, is what matters.” The basis of the article was knowing when to invest is not as important as how long you stay invested. No one can predict the future, and you should stay fully invested. The 2008-09 recession made some investors so fearful that they not only stopped investing but also sold out of the market and locked in their losses. The article demonstrated the power of staying invested. It included an example of a 10-year period from Jan. 1, 2009 until Dec. 31, 2019 and how a hypothetical investment of $1,000 in the S&P 500, excluding dividends, would have performed. If fully invested for that period of time, a $1,000 invested would have grown to $2,775. If you missed the best 10 days during that period, the value was $1,722. If you missed the best 20 days, the value was $1,228; and if you missed the best 30 days, the value was $918. That being said, investors also could have left the market and missed the worst days. Studies have shown that people stop investing when the market is down, especially after really difficult downturns, and return only after the market has begun to bounce back.
Do you have the psyche to stay invested? 2022 has been a really difficult year so far. It’s a little too late to go entirely to cash simply because if you do, you’ll own your losses forever and lose any chance of gain when the market begins its eventual upturn. If you sold your taxable account (not an IRA, 401k, etc.), and it was up, you might also have large capital gains to deal with. If you sell and leave the markets, it is hard to get back in. Anxiety-ridden people will now morph into market timers, waiting on the sidelines for the best time to jump back into the market. Most will not reinvest 100% of their money at once, since they are fearful that as soon as they do, the market will go drop again. If you did sell, the better way to get back in the market is to dollar cost average. This is an investment strategy in which an investor divides up the total amount to be invested over a period of time.
Brad McMillian, the chief investment officer at Commonwealth Financial Network, recently wrote: “Most people look at the market as an independent entity, trying to second-guess how it will act in the future. Most people will, inevitably, be wrong.” The markets bottomed out in 2000, 2008, and recently in 2020. During that time, if you did not panic and stayed invested, you are better off today than those who did panic. Warren Buffett once said as a wise adage for investors: “Be fearful when others are greedy. Be greedy when others are fearful.”
Lessons learned in the past should be remembered. The market by nature is cyclical — it goes up, it goes down. If your portfolio is based on your true risk tolerance, you should have the patience to weather this volatility. In an up market like 2021 (the S&P 500 rose 26.89%), many had additional risk in their portfolio that went unnoticed. Unfortunately, a down market exposes that risk, causing sleepless nights and stress-induced stomach ulcers. Investing in the market should be for the long term and based on your risk tolerance.
In 2008, we worked with a retired couple who had great retirement income. Their pension and Social Security income covered all of their expenses, including plenty for traveling the globe. Their portfolio was invested with a capital preservation-moderate risk tilt (50% stocks; 50% bonds and cash). The markets were brutal, and the husband called our office and asked if we could speak with them since his wife was terrified. When the market was up, she was fine, and when the market was in a free fall, she was a basket case. Tried as we might, she wanted to sell their entire portfolio and place it in cash. The husband wanted to stay fully invested. She told us they didn’t need the money and if it was in cash, they could not lose. Even today, they are still in cash. Since 2009, the dollar had an average inflation rate of 2.32% per year. Savings rates were about 0.50% on 2009 and in 2021 it was about the same depending on which money market they invested. So, they actually did lose money over the past 14 years. Not in the value of their investment but in the purchasing power of their portfolio due to inflation.
The lyrics to the Rolling Stones’ 1964 classic song, “Time Is on My Side,” say it best: “Time is on my side, yes it is.” Be patient and wait out the volatility if you can. Then stroll down to the beach with your favorite book, chair, and beverage, and enjoy a beautiful summer day at the beach.
Fred Dunbar, CLU®, ChFC®, RFC®, AIF®, is President of Planning Directions, Inc., a registered investment adviser, and Common Cents Planning, Inc. He also offers securities through Commonwealth Financial Network, member FINRA/SIPC. Advisory services offered through Planning Directions, and fixed insurance products and services offered by Common Cents Planning, are separate and unrelated to Commonwealth. Fred may be contacted at 800-647-0762, by e-mail at fdunbar@commoncentsplanning.com or by mail at 239 Baltimore Pike, Glen Mills, PA, 19342. He’s always happy to meet with you “down the shore” at 6606 Central Avenue N. Sea Isle City, NJ, 08243.
This commentary is meant for general informational purposes only and is not intended to be a substitute for professional financial, tax or legal advice. Investing involves risks including the potential loss of principal. Past performance is no guarantee of future results.”
All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results.
S & P 500: The Standard & Poor’s (S & P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks.
