Newsletter introduction
By Chris Cassidy
AS A PORTFOLIO MANAGER, I get a lot of calls and emails when financial markets are doing poorly. Market performance in 2008, 2020, 2022, and most recently in April of this year, led to a lot of client conversations. I’m generally asked some version of the following question: “What changes should I make to my investment portfolio in these uncertain times?”
The answer I have responded with in all these cases is, “Probably none.” This answer is often not well received. When markets are plummeting and the world seems chaotic, it’s human nature to want to seek shelter and safety. We are programmed to avoid discomfort.
Successful investing is a lot like other aspects of life. You need to endure short-term discomfort and temporary pain to achieve a desired outcome. You endure the pain of reading books, writing term papers and taking final exams because it is worth getting the degree and the opportunities it affords. You endure the short-term pain of eating better because it is worth the health and longevity benefits that it can provide.
I have a three-year-old daughter. My main goal in life is to be there for her important milestones, be it graduations, a wedding, etc. To try and increase my chances of achieving this goal, I get up every morning around 5am and go for a long run. It’s painful and the older I get the more painful it is. Some mornings I’m sore. Some mornings I’m sleep-deprived (a three-year-old doesn’t always sleep through the night!). However, regardless of how I’m feeling I go for the run because I believe the short-term pain and discomfort will pay off handsomely in the future.
In times of uncertainty and market volatility, it feels much better to hold cash than to be invested in equities. It’s painful to see the value of our accounts drop five, ten or even twenty percent in a short period of time. It makes us uncomfortable, even angry, to lose money.
Historically, there has been a big cost to avoiding short-term pain and discomfort. Over the past one hundred years, cash has returned around 3% annually. Over that same period, equities have returned more than 9% annually. One million dollars invested at 3% grows to $1.75 million after twenty years. One million dollars invested at 9% grows to $5.14 million after twenty years. That’s a huge reward for enduring some pain and discomfort.
Although I preach to clients the importance of staying invested in turbulent times, and not making big changes to their portfolios, there are ways to take advantage of volatility. Jeanne Blackmore has outlined a number of these in her article Planning Through Uncertainty and Volatility. I would suggest referring to these strategies any time financial markets are dropping and chaos seems to be commonplace. You may find a great way of taking action without having to change your investment portfolio.