There is an obsessive focus on the stock market by the media and the general public as the measure and means of investing. And, maybe that is as it should be – we are a half-dozen years into a long bull market; people have very short memories; and they simply haven’t been educated to how true investors grow their wealth over the long-term. It is absolutely true that one would have wanted to be in stocks during past stock bull markets. But this chart shows that there is a reason why true advisors manage investments and not just buy them and forget them.
It took a bit over 4 years for the stock market sectors (EAFE, EM, Sid Cap, REIT, Sm Cap) in the more horizontal oval in the left pane to grow 20% to 40%. It took barely more than a year for these same sectors to lose 40%-50% when the market crashed through 2008.
One strategy that has been marketed by the financial industry is that you should invest in a mix of these assets in a “diversified portfolio” so that in a crash some of them will not fall so much and some may actually go in the opposite direction. This strategy has smoothed portfolios over the past three decades, but has not eliminated large losses. The math says that in the period above, the returns for the first four years of a 60% stock and 40% other portfolio would have been closer to 10% than 20%-plus, and the loss during the crash would still have been between 20% and 30%. Smoother, but a complete wipe-out of previous gains anyway.
There is another approach. Instead of ignoring the seasonality of economies and financial markets, embrace it. Bias toward growth assets when the economy is growing and avoid them when it is not. It means that instead of setting-and-forgetting, one needs to monitor-and-modify. But how can an individual investor or anyone who is investing as a part-time avocation to do this well? I wouldn’t recommend trying. The answer is to find an advisor who actually understands cycles, monitors the economy and markets, has indicators with high correlation to market turns, and has a disciplined strategy to be in growth areas and avoiding declining areas. Calyx Capital Advisors is one to consider.