“Even calamities have a soul
and can teach us a wise life.” -Aristotle
You don’t survive over four decades of advising clients about their wealth without living through a few “calamities” along the way. As Muhammed Ali famously said, “it’s not how hard you fall, it’s how hard you get back up that matters.” Maybe he was borrowing from Aristotle, but Ali was right. The lessons learned from previous economic and market crashes inform how we view and will navigate the current crisis.
1. Over time, markets go up.
Unless someone is prepared to dismiss our democratic capitalist system as a failed model, we know that the US economy is not only the largest in the history of mankind ($21 Trillion of GDP), but it’s also the most resilient. The underpinnings of our system include small businesses acting in their best interests to grow profits, large corporations motivated to grow shareholder value, and entrepreneurs creating new technologies and medical advances for the betterment of society.
The profit and growth motive that drives our system has resulted in stock prices rising over time. Of course, they don’t always go up in a straight line, and certainly there will be periods of great volatility. Yet according to Ibbotson Associates, if you had invested $1 in US stocks in 1925, it would have been worth $7,352 by the end of 2016, while bonds would have turned your $1 into $225, and a dollar of cash would have been worth just $21 at the end of that 91-year period.
Now most of us don’t have the luxury of a 91-year time horizon but consider this: markets suffered double digit declines during 22 or the last 39 years, yet still ended those years with positive returns 75% of the time (source: JP Morgan). Ride out the volatile periods. Pullbacks happen.
2. No one can time the markets.
Just as bells don’t go off to warn us when markets have peaked, no one rings a bell at market bottoms. Bernard Baruch famously said “don’t try to buy at the bottom and sell at the top. It can’t be done except by liars.” If you think you can sell now and just wait this out, you’ll likely be disappointed. Putnam Investments performed an analysis of market timing that demonstrated what would have happened if you had invested $100,000 on January 1, 2004 and missed only the top 10 best “up” trading days in the ensuing 15-year period (that’s just 10 out of approximately 3,750 trading days). Their conclusion: your portfolio would have been worth $154,810 vs. $307,110 for those who stayed the course. That’s an annualized return of 3.0% vs. 7.8% for investors who did not time the market, or an opportunity cost of $152,000.
3. Diversification really works.
Imagine if you were invested in only bonds last year when the US stock market (S+P 500) rose over 30%. Now imagine if your portfolio consisted of only stocks in 2020. You’d have felt like you had missed the boat last year or you’d be upset about a 20%+ decline in your portfolio this year. Owning a little of everything may be boring in a roaring bull market, but in times like these, you can endure a lousy stock market knowing your bonds will help soften the blow. Charles Schwab and Co. published a study in 2016 illustrating this point. They compared the performance of an all-stock portfolio vs. a “60/40” portfolio (60% stocks/40% bonds) from 1999-2016. Despite the dot.com bubble, the Great Recession, and all the market corrections in between, the 60/40 portfolio outperformed the all-stock portfolio by a cumulative 13.6%. The reason is simple: when markets fall sharply, a diversified portfolio has less ground to make up than an all stock portfolio.
Every market correction is precipitated by something different, but having lived through many of them, we are confident that embracing these basic principles will keep you on track to meet your financial goals.
Especially during turbulent times like these, we will continue to communicate frequently, and trust that you will reach out with any concerns or comments. We greatly appreciate the trust you have placed in us and will strive to earn it every day. Please stay safe, stay healthy, and we’ll all get through this together.
What You Should Do Next:
- Contact us with any questions or concerns about your investments, the financial markets, or for more information on how we’re helping our clients.
- Read our recent relevant articles on the current market turbulence:
- Click here to learn more about the ClearRock approach and process.
- Speak with one of our Senior Advisors.
1. Large stocks are represented by the Ibbotson Large Company Stock Index. Corporate bonds are represented by long-term corporate bonds. Government bonds are represented by the 20-year U.S. government bond, and inflation by the Consumer Price Index. Underlying data is from the Stocks, Bonds, Bills, and Inflation® (SBBI®) Yearbook, by Roger G. Ibbotson and Rex Sinquefield, updated annually. An investment cannot be made directly in an index. Ibbotson® SBBI® 1926 -2020.
Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by ClearRock Capital LLC) or product will be profitable or equal the corresponding indicated performance level(s).
Some material in this article is based on information from a variety of sources we consider reliable. However, we do not represent that the information is accurate or complete. The material provided herein is for informational purposes only. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from ClearRock Capital, LLC. If the reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, then he/she should consult with the professional advisor of his/her choosing. A copy of our current written disclosure statement discussing our advisory services and fees is available for review upon request.