My Quarterly Statement
A lot has changed since the start of the year. We have a ground war in Europe. Elon Musk is taking over Twitter. The Boston Celtics are a favorite to win the NBA Finals. And lastly, there's been a re-introduction of the quarterly portfolio statement that doesn't always go up.
Yes, it's true. Portfolios don't go up all the time, including ones once deemed 'safe' and 'conservative.' We're also not entitled to immediate recoveries every time the market goes down, as has seemingly been the case for the last decade. Thanks to inflation, cash and bonds have turned into risk assets, making this cycle unique. Let's look at the landscape.
Bonds
Arguably, the worst place to invest capital over the past 6-9 months has been the part of the portfolio that most deem to be the safest. The total return of the Bloomberg Global AGG is <10% YTD. As the chart below shows, we've really never seen anything quite like it. It's a reminder as to why bonds can be problematic when being used as a capital preservation tool when there is a duration mismatch. This all being said, it's very important to understand that higher interest rates are a good thing for bond returns over a longer period of time. They still serve a role in a long-term asset allocation plan. Don't bail now. Thanks to Jim Bianco for the chart.
As an aside, higher interest rates aren't just hitting bond prices. They're really starting to take a toll on housing affordability, which is increasingly concerning. Percentage of disposable income relative to home prices is now higher than the 2006 peak. Credit to Cullen Roche.
Cash
Your checking and savings accounts are not meant to earn a rate of return. However, for those considering cash as a temporary investment sleeve in the portfolio until 'things get better', the cost has never been higher. The 12-month rate change in the CPI was 8.5%. Said another way, the real return for cash (assuming it's earning nothing) over the last 12 months was - 8.5%. This strategy isn't preserving principal one bit. It's a losing one.
Stocks
Now widely reported, there has been massive pain inflicted in many individual stocks, including some biggies. As I write this, Paypal and Netflix are currently in ~ 70% drawdowns. Facebook (Meta) ~ 50%. That said, 'the market' as defined by a basket of diversified index funds is down for the year but has held up remarkably well given the environment. Diversification for the win (again.) The stock market is a market of stocks, and there are always areas within that universe (hello, energy) doing well. Given inflation and the need to maintain and grow purchasing power, I'll take my chances with a diversified basket of stocks, a sound portfolio strategy and time horizon more than 5 minutes. We all need some kind of return on our money to fund retirements, buy houses, and pay college tuitions.
Closing Thoughts
- Have perspective. The S&P 500 did ~ 30% in 2019, ~ 20% in 2020, ~ 30% in 2021. I'll repeat again - please have some perspective.
- There are no magic solutions. Anyone offering up an investment opportunity 'no risk' or 'upside with downside protection' is probably short-changing the trade-off and context discussion. You are giving something up no matter what path is taken. Risk cannot be eliminated in investing, only transferred to a different part of the timeline.
- I've always said that I fear a longer bear market than a deeper bear market because of how it will sap the patience of investors and just wear them out. Not one statement down 30%, followed by an immediate recovery (think March 2020.) But ten out of the next twelve statements down 3-4% each. Death by a thousand cuts, if you will. We'll see how this plays out.
