The passing of Justice Ruth Bader Ginsburg is a tragic loss. I learned about her life from the movie On The Basis of Sex, and I've enjoyed reading the recent articles about her accomplishments. She opined on many issues, and one quote from a 2017 interview with the BBC particularly stood out to me. Justice Ginsburg said, "I am optimistic in the long run. A great man once said that the true symbol of the United States is not the bald eagle. It is the pendulum. And when the pendulum swings too far in one direction, it will go back."
As an investor, the pendulum analogy resonated with me because markets, all markets, have wide gyrating swings and rarely remain stagnant. Since 1926, the S&P 500 has generated an average annual return of 10%, but it has never closed a calendar year with a 10% gain. The range of returns has been far and wide. In 1931 the S&P 500 fell by 43%; in 1933, it rose 54%. Extreme market moves are not limited to stocks. US long-term interest rates rose from 6% to 15% from 1972 to 1982. They fell back to 6% in 1992. The spot price for West Texas Intermediate Crude climbed to $133 from $47 in three years. It would collapse back to $47 one year after reaching its peak price. Gold hit a high of $637 per ounce in 1980, and it did not breach this price again until 2007. Recently, gold climbed above $2,000 per ounce, passing the previous high set in 2011. It dropped 42% from 2011 to 2015. Markets are continuously moving, which is emotionally challenging for investors.
When a trend is in place, investors assume it will last forever, and forever is a long time. From January 1995 to March 2000, the NASDAQ rose 542%. Convinced it would continue, individuals were buyers of stocks. It peaked in March 2000 and then fell 75%. It would not eclipse its previous high for another fifteen years.
Growth stocks have outperformed value stocks for the past two decades, and investors are confident value is dead. A Google search for "Is value dead?" will produce thousands of articles. At some point, value will beat growth, but no one knows when this will occur.
A shifting market can be beneficial to investors. When the pendulum swings too far to the left and stocks become cheap, use it as an opportunity to buy great companies at lower prices. When it swings too far to the right and stocks become overvalued, sell some shares to lock in your profits. A market in motion is favorable to the enterprising investor.
What if you don't want to own fluctuating investments? Can you altogether avoid risk? Yes, in the short term. The one-month US T-Bill has never lost money if held to maturity. It's considered the safest investment in the world. Of course, you won't make money either after taxes and inflation. The 94-year average annual return for the one-month T-Bill has been 3.3%, and inflation averaged 2.9%, so your net return, before taxes, was .4%. A $1 investment in 1926 was worth $22 in 2019. The same $1 invested in the S&P 500 increased to $9,237, or 41,886% more than the safe investment.
Of course, no trend lasts forever. The Boston Red Sox and Chicago Cubs were cursed never to win another World Series until they did in 2004 and 2007, respectively. In 2016, the Cleveland Cavaliers won the NBA championship, the cities first major sports title since 1964.
If trends don't last forever, how can you take advantage of an ever-changing market?
- Plan. Set goals. A financial plan can help you prioritize and quantify your goals. It can also keep your emotions in check as you oscillate between greed and fear.
- Diversify your assets. Diversification allows you to own several asset classes like stocks, bonds, and cash. A diversified portfolio exposes you to a wide variety of investments, some of which should perform well.
- Cash. Allocating a portion of your portfolio to cash gives you a chance to purchase stocks when they fall.
- Take Profits. When stocks or bonds rise above your price target, sell some shares, and lock in your profits.
- Rebalance. Rebalancing your portfolio once or twice per year will help you maintain your risk level and asset allocation. Automating this process will help you to buy low and sell high without emotion.
Markets fluctuate, it's what they do, so don't worry when the pendulum swings too far to the left or right. Rather than worrying about extreme cycles, focus on your plan and goals – and the facts of the case.
"So often in life, things that you regard as an impediment turn out to be great, good fortune." ~ Justice Ruth Bader Ginsburg
September 23, 2020
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM's custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren't suitable for every investor.
 Dimensional Matrix Book 2020