Exciting Times, Boring Strategy
For better or worse, I think that anyone paying attention can agree that we live in exciting times. There are many positives in the world: technological innovation, encouraging employment numbers, positive long-term trends in global poverty (even if tragically interrupted by COVID). However it is now, as always, the negative that holds our attention in the news: COVID, wars, scandals, political gridlock, inflation, supply chain issues, celebrity dating drama… the list seems to go on and on. And yet, with all this ‘excitement,’ our planning and investment approach at Financial Professionals, Inc. remains the same boring, tried-and-true strategy that we’ve employed through the years.
Of course the whole process begins with a plan. This could be as deep as a comprehensive financial planning process or as simple as a 30 minute conversation with a calculator and a notepad. Either way, an investment strategy only makes sense in the context of a date-specific and dollar-specific set of goals. Armed with these goals and timelines we look at defeating two enemies: inflation in the long term and volatility in the short term.
Our weapon against inflation is very simple – shares of ownership in the great companies of the US and the world. Put another way: stocks. By way of example, let’s imagine that you invested all of your money in the S&P 500 Stock Index in March of 2000 and simply left it alone through February of 2022.
It might be fair to ask, ‘Has Rob cherry-picked a date on us? March of 2000 seems an odd date to have selected.’ And you would be correct. I did, in fact, cherry pick March of 2000. This month saw the peak of the Tech Boom of the 90’s and would have been arguably the single worst month to have invested in stocks since the late 1960’s. This 22 year period includes geopolitical crises like 9/11, the start and end of the Iraq and Afghanistan wars, Russian invasions of Georgia, Crimea and Ukraine and questions about the solvency of EU members. It includes two of the worst bear markets since World War II, stemming from the bursting of the Tech Bubble and the Housing Bubble (each of these saw your investment in the S&P 5001 lose approximately half of its value before recovering, and the latter saw a near-failure of the banking system). It saw US gas prices rise above $4 twice, hitting $4.11 in 2008 and $4.43 in March of 2022 (if you’ll permit me to add the current month to our timeline). It includes health crises like H1N1, Ebola and, of course, COVID-19. It includes one Democratic and two
Republican presidencies, plus the start of another Democratic presidency. It even saw multiple controversial presidential elections, including Bush/Gore which required the involvement of the Supreme Court. I could go on, but I will stop there at risk of piling on!
But for you – buying in March of 2000 and holding through February of 2022 – your average return, with dividends reinvested, would have been 7.25% annually (5.26% without dividends). Over time this has comfortably outpaced the annual Consumer Price Index (CPI) increase of 2.33%3. While there are obviously no guarantees that this pattern will continue, it seems to us that stocks give us excellent long-term odds of outpacing inflation regardless of the headlines that come and go in the background.
But there is a problem – this historical long-term outpacing of inflation has come at the cost of short-term volatility. What if you needed to sell shares during one of those 50% bear market declines so that you could retire, buy a house or send your child to college? How can we mitigate against the major problems that would result from selling those shares at such a deep loss? Our weapons against this short-term volatility are cash and bonds. Over the same 22 year period since March of 2000, the Vanguard Total Bond Index Fund would have averaged 4.54% annually – a decent return, even if it does not show as well against CPI. In exchange for this reduced return you get a historically less volatile investment with more muted highs and lows. By keeping 6-10 years of your expected withdrawals in bonds and cash we are able not only to avoid selling shares of stocks while they are down, but even to occasionally purchase more shares while they are down.
And there you have it: create a plan, fight inflation with stocks, fight volatility with bonds and cash. It is not particularly sexy, and it will probably never be the lead story on Yahoo! Finance. But in a world filled with excitement, sometimes boring is beautiful.
 It is not possible to invest directly in an index.  https://www.usnews.com/news/us/articles/2022-03-13/average-us-gas-price-spikes-79-cents-over-2-weeks-to-4-43  https://politicalcalculations.blogspot.com/2006/12/sp-500-at-your-fingertips.html  Vanguard Total Bond Index Returns taken from Morningstar