First Quarter 2023 saw stocks continue their roller-coaster ride that has been ongoing for more than a year now. Though most major market indices ended the quarter in the black, there was significant volatility along the way.
Turbulence in the stock market often leads to “volatility fatigue” for many investors, tempting them to throw in the towel and move into cash, locking in their losses in the process.
Sadly, recent data shows this is exactly what’s been happening with individual investors lately. According to the Investment Company Institute, total net assets in money market funds rose to a record $4.81 trillion in the week ended January 4th. That surpassed the prior record set in May 2020 – which (you might recall) turned out to be in the early stages of a massive recovery in stocks.
Fleeing to cash is a bad idea in any economic environment, but it’s especially bad in a high-inflationary environment. As the rising costs of goods and services erodes purchasing power, a dollar buys less and less. With the U.S. inflation rate currently around 6% and 10-year Treasuries yielding a little more than 3%, investors who are moving large chunks of their assets to the perceived safety of cash are effectively losing money.
It may not feel that way from day-to-day, but there’s no denying this reality in the long run. We recently came across the below image from a TIAA-CREF ad from 1997 that drove the point home in a jarring way:
The ad was intended to shock investors into understanding the caustic effects of inflation over time. What’s jarring about it now is just how accurate those prices seem today. While it’s certainly possible to get a burger and fries for less than $16 or buy a car for less than $65,000, anyone who’s eaten at a sit-down restaurant or wandered into a car dealership recently would have to agree those projections from 26 years ago seem pretty spot-on.
History shows time and again that the only reliable way for investors to maintain their purchasing power over the long run is with a significant allocation to stocks1. The problem is that many investors don’t really invest in stocks – they gamble with them. They jump from sector to sector, chasing performance and usually arriving late to the party. We’ve seen this in the past few years with the massive asset flows into (and out of) meme stocks, tech stocks and crypto currencies.
Asset class performance varies wildly from year to year, and it’s impossible to predict. In 2020, large growth stocks led the market by a wide margin. In 2021, U.S. REIT (real estate) stocks substantially outperformed all other asset classes. Then, in the 2022 bear market, value stocks performed much better than growth stocks2.
We believe there is a much better way to mitigate the effects of stock volatility and keep your purchasing power ahead of inflation: Diversification. Well-diversified portfolios don’t avoid volatility entirely, of course, but they do help smooth the edges and potentially avoid the sort of catastrophic losses investors in concentrated portfolios have suffered in recent years.
If that seems like common sense, well…it is. But as we’ve seen in the data above, most investors just can’t seem to avoid the temptation to chase performance and then flee to cash when stocks go into a downturn – a pattern that costs them untold wealth in the long run.
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We’ve spoken before in this space about how important maintaining an optimistic outlook is to investment success – and we’ll freely admit that this is often easier said than done. When we are bombarded all day, every day with all that is wrong with the world in the news and on social media, it feels Pollyanna-ish to just say “oh, it will all work out.”
But it is possible to acknowledge the challenges that humanity faces and still maintain our faith that we will find solutions to them, because we can look back in history and see that it has always been so.
Take, for example, the “Great Horse Manure Crisis of 1894” (we are not making this up). In the late 1800s, the city of New York had more than 100,000 horses producing more than 2.5 million pounds of manure per day. City planners were rapidly running out of room to dispose of it, and disease and, well, massive unpleasantness were running rampant.
The problem was considered insurmountable. Yet, within a decade, the crisis completely disappeared – thanks to the advent of new technology in the form of the automobile.
Today the world is grappling with the effects of gas-powered vehicles and coal-fired power plants emitting billions of tons of carbon dioxide into the atmosphere while also depleting the world’s finite energy reserves. The problem indeed seems insurmountable. And yet a little-noticed item in the news at the end of 2022 showed that, yet again, human ingenuity may be in the early stages of solving it.
This past December, scientists at the National Ignition Facility at the Lawrence Livermore Laboratory in California were able to create a controlled nuclear fusion reaction in their lab that produced more energy than it required to create – something they had not been able to accomplish in more than six decades of attempts.
Unlike nuclear fission, which is the type used in today’s nuclear power plants and produces significant amounts of radioactive waste, nuclear fusion is a clean and potentially endlessly renewable energy source. It’s the same type of reaction that powers the sun and has long been considered the holy grail of energy development.
Many skeptics thought creating controlled nuclear fusion that produced more energy than it consumed was a fantasy that would never be achieved, but the scientists at the NIF have proven that it’s possible. While experts say this so-called “cold” fusion is likely several decades away from being a viable commercial power source, the achievement was monumental and proved that, once again, we may be on our way to solving an energy problem that once seemed unsolvable.
The hardest part about maintaining faith in the future is that the future is unknown, and all our present-day problems are very much known. Truthfully, it’s far easier to adopt a doom-and-gloom attitude than an optimistic one. Yet it’s vital for investors to reject that mindset, because fatalism seeps into one’s views about investing, and that may lead to overly conservative investment decisions and a philosophy that’s little more than “everything’s falling apart so I need to keep what I’ve got.”
The bottom line is that keeping our faith in the future isn’t just good for our mental health – it’s also good for our financial health. And history shows that faith has always been justified.
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We want to express our sincere gratitude for your continued trust and support during the merger with Savant Wealth. We are pleased to report that the initial stages of integration are going well. You will begin to see us transition to using our savantwealth.com email address later this month. Our capdir.com email addresses will be forwarded to our savant wealth emails for the foreseeable future. Our legacy www.capdir.com website will fully transition to www.savantwealth.com shortly as well. We will keep you posted as we make these transitions. If you have any questions, please do not hesitate to contact us.
- Source: Morningstar Direct. S&P 500 Index real returns vs. One-Month US Treasury Bills real returns.
- Source: Morningstar Direct. Large Growth Stocks = Russell 1000 Growth Index; US REIT = Dow Jones US Select REIT Index; and
This commentary is intended for general information purposes only. No portion of the commentary serves as the receipt of, or as a substitute for, personalized investment advice from Savant or any other investment professional of your choosing. Different types of investments involve varying degrees of risk, and it should not be assumed that future performance of any specific investment or investment strategy, or any non-investment related or planning services, discussion or content, will be profitable, be suitable for your portfolio or individual situation, or prove successful.