What Is Safe?
When I started my investment career more than thirty years ago, a Wall Street veteran said investing in stocks is not for the faint of heart. He added it takes courage, stamina, and faith to remain invested during the difficult years. He knew what he was talking about because he started his career during the bear market of 1973 and 1974 when the S&P 500 fell 41%. I was young and didn't appreciate the power of his words then, but I do now. Investing is a game of survival, and if you can hold on, stocks usually win in the end.
During times of a market rout, it would be nice to sell stocks, buy T-Bills and ride out the storm, but it's impossible to time a market correction or its duration. Investors panic when stocks fall and buy US Treasuries because they're safe, but what is safety? In the near term, investing in T-Bills appears prudent, especially when stocks fall, because you can protect your assets. In October 1987, the S&P 500 fell 21.5%, while 1-Month T-Bills rose 0.60%. Last month, stocks tumbled 8.7%; T-Bills were flat. In fact, since 1972, T-Bills have outperformed stocks forty percent of the time! In other words, over the past fifty years, T-Bills beat stocks for a combined twenty years.
If T-Bills beat stocks 40% of the time, why not invest in this safe asset class? Well, the long-term returns for T-Bills are anemic. Fifty years ago, a dollar invested in T-Bills is worth $8.66 today for an average annual return of 4.4%. It's true that T-Bills are safe and have never lost money, but their returns have trailed inflation before taxes. A T-Bill is an excellent choice if you need money in the near term, but it's a poor investment for creating generational wealth.
On the other hand, stocks are volatile, and they often crash, including this year. Since 1972, the S&P 500 has finished a calendar year in negative territory ten times or twenty percent. From July 1982 to July 1983, the index fell 43%, and during the Tech Wreck from 2000 to 2002, it dropped by the same amount. In 2008, it declined 37%, and this year the index is already down 16%. And, from 2000 to 2010, stocks averaged a paltry 0.6% per year!
Despite violent moves, stocks produced an average annual return of 10.7% since 1972, and $1 turned into $162, or more than nineteen times that of the "safe" T-Bill. If your goal is to create wealth, buy stocks.
Tennessee Williams said, "You can be young without money, but you can't be old without it." Don't let your short-term fears derail your long-term goals. Your older self will thank you!
May 11, 2022
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management, located 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.