Investor Minute
BEST-PERFORMING ASSET CLASSES
According to Yale University's Crash Confidence Index, only about 27% of investors are confident the stock market will not crash sometime during the next six months.1
But if fear leads investors to avoid the entire investment class, they may limit their potential returns. For example, during the 20-year period ended December 31, 2018, stocks had an average annual return of 7.2%. By comparison, bonds returned 5.5% and cash 1.8% during the same timeframe. During that 20-year stretch, stocks outperformed bonds and cash in 14 years out of 20.2
But the stock market is volatile. Between October 9, 2007 and March 9, 2009, the Standard & Poor’s 500 stock index shed well over half its value. But then the S&P 500 started clawing its way back and ended 2010 within 20% of the October 9, 2007, close.3
If the impulse to be safe keeps investors out of the stock market, it may also keep them from taking advantage of the potential returns the stock market has to offer.
Cash alternatives – the most conservative of the three investment classes – outperformed stocks and bonds only twice during the 20-year period.2
A sound investing strategy considers short-term volatility without losing sight of long-term objectives.
A sound strategy can involve diversifying capital between different classes of investments. That way, under-performance in one type of asset may be offset by the performance of another.
Bear in mind, though, that diversification and asset allocation are approaches to help manage investment risk. They do not eliminate the risk of loss if a security price declines. The asset class that performs best one year may not do so the next. Diversifying your holdings among several different investment types and understanding that asset classes can move in and out of favor may help you manage the risk in your investment portfolio.
Changing Lead
The asset class that performs best one year doesn’t necessarily do so the next.2
- Yale University, 2018
- Thomson Reuters, 2019, for the period December 31, 1998 through December 31, 2018. Stocks are represented by the S&P 500 Composite index (total return), an unmanaged index that is generally considered representative of the U.S. stock market. Bonds are represented by the Citigroup Corporate Bond Composite Index, an unmanaged index that is generally considered representative of the U.S. bond market. Cash is represented by the Citigroup 3-Month Treasury-Bill index, an unmanaged index that is generally considered representative of short-term cash alternatives. U.S. Treasury bills are guaranteed by the federal government as to the timely payment of principal and interest. However, if you sell a Treasury bill prior to maturity, it could be worth more or less that the original price paid. Index performance is not indicative of the past performance of a particular investment. Past performance does not guarantee future results. Individuals cannot invest directly in an index.
- Standard & Poor’s Corp, 2019. The high of 1565.15 was recorded on October 9, 2007 and the low of 676.53 was recorded on March 9, 2009. The S&P 500 Composite index (total return) is an unmanaged index that is generally considered representative of the U.S. stock market. Index performance is not indicative of the past performance of a particular investment. Past performance does not guarantee future results. Individuals cannot invest directly in an index.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2021 FMG Suite.
The price of ignorance: Mistaken money beliefs can cost you
In talking about the way he handled his finances, comedian Steve Martin said, “I love money. I love everything about it. I bought some pretty good stuff. Got a $300 pair of socks. Got a fur sink. An electric dog polisher. A gasoline powered turtleneck sweater. And, of course, I bought some dumb stuff, too.”1
Unfortunately, liking money and even accumulating lots of it, doesn’t go hand in hand with knowing how to use it wisely.
Though we are a wealthy nation, many Americans feel that the solution to their financial challenges lies in simply bringing in more money. For anecdotal evidence, just ask anybody you know. But you can also see this idea reflected in the overwhelming popularity of stimulus payments, the rise in so-called side hustle jobs, and the continued growth of the lottery market.2
This is not to say that many people do not have much to spare above basic living expenses, especially as the cost of housing has continued to skyrocket in many parts of the country.
But people at all income levels could be doing much better with what they have, and a big part of the problem is ignorance about how finances actually work. This general lack of understanding was borne out in a study by the Financial Industry Regulatory Authority (FINRA) that found that while 71% of Americans claim to be financially literate, only about 34% can correctly answer a short quiz about basic financial concepts like compounding interest.3
Unfortunately, without adequate financial knowledge, people tend to make poor decisions, leading to unneeded anxiety about their finances.
According to advisor and financial writer Rick Kahler, the first step people need to take is not cramming their heads with new knowledge, but consciously “unlearning” their internalized fallacies about money. This is often not easy to do, because much of what we think about money is intertwined with other long-held core beliefs.4
On top of this, says Kahler, is the additional burden of societal shame people feel about their financial situation. People feel embarrassed about making too little. People feel embarrassed about making too much. And then there’s the shame that comes with knowing you haven’t been doing a good job managing your money.
Prudent investors know that financial education can (literally) pay dividends down the road. And a trusted advisor will not only be a source of accurate information and valuable experience, but they can serve as a confidential money counselor. Someone with whom you feel comfortable sharing every aspect of your financial life, the good as well as the potentially embarrassing.
It feels good knowing that you have an accurate view of how your financial plan is supposed to work. It feels even better when you know you have less cause for worry.
Sources:
1. http://go.efficientadvisors.
2. http://go.efficientadvisors.
3. http://go.efficientadvisors.
4. http://go.efficientadvisors.
Disclosure:
The views expressed herein are exclusively those of Benedetti Financial, Inc. and Efficient Advisors, LLC (‘EA’), and are not meant as investment advice and are subject to change. All charts and graphs are presented for informational and analytical purposes only. No chart or graph is intended to be used as a guide to investing. EA portfolios may contain specific securities that have been mentioned herein. EA makes no claim as to the suitability of these securities. Past performance is not a guarantee of future performance. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. All opinions expressed herein are subject to change without notice. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. You should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Investing in any security involves certain systematic risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any unsystematic risks associated with particular investment styles or strategies.
How bad is buying at the peak of the market?
Roy Sullivan was enjoying a quiet Saturday morning of trout fishing when the lightning bolt struck. It hit him on the top of his head and exited his lower body, causing burns down his chest and abdomen. Stunned by the strike but still alive, Sullivan was returning to his car when a black bear charged out of the woods and tried to steal his string of freshly-caught fish.
This was the seventh documented occasion that Roy Sullivan had been struck by lightning.1
If you wanted to imagine a similar string of bad luck in the world of investing, you might think of a person who only puts money into the market a few days a year, and by some stroke of extraordinarily bad fortune, each of those days happens to be when the market has reached a new all-time high.
After all, there's only one direction you can go from a peak.
This is, in fact, one of reasons some investors choose to use "dollar cost averaging" when investing large sums. This method divides a larger sum into smaller increments to invest into the market over a period of time, with the hope of minimizing the risk that you chose to put it all in on the “worst” possible day.2
But is a new market high the “worst” possible day if your investing time horizon is several years or even decades?
Advisor and financial writer Ben Carlson wondered how much it would cost someone to experience this perceived bad luck. He asked: What would happen to your returns if you invested only on the market's peak days?3
What he discovered runs contrary to conventional wisdom.
First, Carlson looked at the frequency of new all-time high days. He defined these as days when the S&P 500 reached a value that superseded its previous high. For example, he determined that from 1988 through 2020 there had been more than 600 all-time highs, about 7.3% of all trading days.
Next, he compared returns for buying the index over time versus buying only on the peak days. The results are surprising. According to his calculations, a person who invested only on peak days would have had slightly better returns than a person who spread out their purchases over all days.
"All-time highs tend to beget all-time highs," he says, "simply because that's the way the markets work in a raging bull."
Carlson doesn't recommend trying to target all-time highs specifically as an investing strategy. There's no way to predict when new peak days will occur. Rather, he points to it as a demonstration that investing at all-time highs doesn't have to be a losing proposition.
Of course, the past performance of the market is no indicator of how it will perform in the future. And historically, there have been some long periods between successive all-time highs. But the evidence suggests that new highs can be as temporary as whatever recent low you’re measuring.
Investing for the long haul means following the evidence rather than your instincts. So, a prudent investor will take a broadly diversified approach with the close support of a trusted financial advisor.
Sources:
1. http://go.efficientadvisors.
2. http://go.efficientadvisors.
3. http://go.efficientadvisors.
Disclosure:
The views expressed herein are exclusively those of Benedetti Financial, Inc. and Efficient Advisors, LLC (‘EA’), and are not meant as investment advice and are subject to change. All charts and graphs are presented for informational and analytical purposes only. No chart or graph is intended to be used as a guide to investing. EA portfolios may contain specific securities that have been mentioned herein. EA makes no claim as to the suitability of these securities. Past performance is not a guarantee of future performance. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. All opinions expressed herein are subject to change without notice. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. You should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Investing in any security involves certain systematic risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any unsystematic risks associated with particular investment styles or strategies.