Key Takeaways
Since the 1870s, U.S. stocks have never lost money over any rolling 20-year period. They’ve rarely lost money over any rolling 10-year period.
Good returns aren’t about timing the market; they’re about TIME IN the market.
Establish a plan and stick to it.
Research shows the best time to get into the market (or back into the market) is today.
Whenever we have some volatility in the market, people ask me: “Is now still a good time to invest?”
It reminds me of the 1993 comedy classic Groundhog Day in which a TV weatherman (Bill Murray) keeps living the same day of his life over and over again. Sure we’re seeing higher inflation and almost certainly higher interest rates starting in March. But when people hear the term “stock market,” they think U.S. large cap stocks. There are plenty of other investment opportunities in small cap stocks, value stocks and non-U.S. companies that offer good prospects going forward. If nothing else, times like these are when you want to revisit your investment objectives and make sure you have a plan in place that can serve as a guidepost for tough decisions.
We’ve seen this movie before, haven’t we?
Back in 1994, shortly after Ground Hog Day hit movie theaters (remember those?), the Fed made a poor decision to raise interest rates very sharply over a period of months because it feared the economy was overheating. Between January and November of 1994, the Fed raised rates five time by a whopping 2.5% in total – including 0.75% at once in November. Then it reversed course in 1995 after decimating the bond market and stalling the economy. Ever since then, the Fed has employed a policy of more gradual rate hikes (typically in 0.25% increments) and has gotten better at signaling guidance to investors. Side note: Stocks rallied by 36% over the next 12 months after the fifth and final 1994 rate hike in November of that year.
It turns out rising interest rates are often good for investors in the long term. We’ve been living in an era of extremely low rates. Without getting too technical, when your risk-free interest rate on Treasuries is this low, then your expected return on risk assets such as stocks is lower than normal. Having a more normal interest rate environment is important for maintaining a healthy economy and investment assets.
Volatility is not something to be feared, even if you’re retired Volatility is part of being a savvy investor. The key is to manage it, not to dig a groundhog hole and hide from it (like your shadow). If nothing else, it may be time to re-think your time horizon. There may be some volatility and downdrafts in the markets over the next few months as investors adjust to the new rate environment. But stock investing should be measured in at least five-year intervals, and more often in decades. Going back to the 1870s, did you know that U.S. stocks have never lost money over any rolling 20-year period and have very rarely lost money over any rolling 10-year period?
Think bigger and broader
Many investors think they’re properly diversified when in reality they are not. If you’re heavily invested in traditional broad based index funds or ETFs, you’re actually over-weighted on the tech sector, since tech companies now account for a disproportionate share of U.S. indexes. That’s a form of concentration risk. Growth stocks such as tech companies often struggle in a rising rate environment because higher interest rates reduce the value of their future cash flows, thus reducing the value of current stock prices. That’s one reason why we don’t strictly employ traditional indexing here at Novi.
Your investments should be consistent with your goals and time horizon
If you’re retired and living off your investments, the natural inclination is to take risk off the table during (or after) a sharp drop in stocks. This is not a good strategy. If you’re a Novi client, we’ve already accounted for your future cash flow needs through planning and investing in inflation-protected bonds, short-term bonds, and/or individual municipal bonds. Those assets will mature in time to meet your living expenses. You don’t want to alter your stock allocation target because you need the growth potential of stocks to help you outpace the ever-rising cost of living.
If you’re still working but within five years of retiring, make sure you are clear about where your money will come from in your first five years of retirement. During a downdraft in the markets, you don’t want to be in a position where you need to sell a stock that’s sliding. You want to be sufficiently diversified so that you always have an investment you feel comfortable selling if you need to raise cash for your needs.
If you’re in the middle of your career, make sure you’re not sitting on too much cash while waiting for the market to bottom out. I know you have lots of expenses at this stage of your life, but waiting for the “best” time to get back in the market invariably turns out to be yesterday!
When it comes to cash, make sure you have an emergency reserve on hand. Have short-term investments to meet your shorter-term goals such as home renovations or second homes, etc. Then, be as aggressive as possible with the remainder of your funds while remaining properly diversified. When it comes to implementing your plan for investing cash, set a specific price target or timeframe and then stick to it!
Conclusion
At the end of the day, good returns aren’t about timing the market; they’re about TIME IN the market. Academic research shows time and time again that the best time to get into the market is today! Chances are pretty darn good that 10 years from now, it’s going to be higher than today. I’m sure you’ve heard this before: Have a plan and stick to it. If you aren’t afraid of your own shadow, spring might come earlier than you expect!
Happy Groundhogs Day everyone!
If you are looking for a professional advisor to help construct a plan for you, don’t hesitate to reach out. We have experience in this area and are happy to help.
RYAN M. VOGEL, CFP® is the CHIEF PLANNING OFFICER, PARTNER at Novi Wealth