June 17, 2022
Markets have not been calming for people in 2022.
First let's look at what we didn't do.
In the past several years, quite a few outlandish ideas proliferated in the investment world. Cryptocurrencies, meme stocks, stock-trading apps, venture capital and private equity growth into often flimsy startups, interest rates at zero and bonds issued at almost zero guaranteed return to owners, housing prices inflated far beyond what an American worker could reasonably afford... the list was long.
All of these things we watched at One Day In July. We were not amused, as investing is not entertainment, and we thought the bill would eventually come due. We stayed away from "The New New Things," as author Michael Lewis would call them. This doesn't mean New New are not having an effect on the more traditional universe in which we operate: corporations that create value and bond agreements whereby money is loaned for a fixed return. These things have worked for centuries, we know they work, we know extremely low-cost indexes are the best entree vehicle into these known things that work, and that knowledge creates confidence and calmness.
As markets go down, and that is certainly expected and a normal part of investing, we are not scrambling for risk controls now, as that was considered in every portfolio up-front. (1) The risks from individual stock positions, high-fee funds, or arcane securities or concentrated positions generally should not affect clients. The broad diversification in the indexes reduces unsystematic risk. The index will not go to zero, a fate that can befall an individual security. (2)
At some point the decline will slow, and then reverse, as investors reconsider an entry point in the market. (And there is a lot of cash on the sidelines! According to the St. Louis Fed, checkable deposits for households and non-profits rose from $1.3 trillion two years ago to $4.65 trillion at the end of March 2022). (3) In terms of the equity market, this inflection will happen when investors believe the present value of dividends and retained earnings of corporations, extended into the future, are worth the price paid today. Remember, investing is sacrificing consumption today to buy future cash flows.
In this regard, looking forward into the future, the environment feels better now than it did in December, as those cash flows are cheaper. This understandably, and correctly, may not comfort someone who is only drawing from a portfolio to pay for retirement. But regardless of whether the investor is adding to or depleting the portfolio, the lower valuations today imply a better future expected return.
So, with the exception of reading my emails and those from other One Day In July Advisors (ha ha!), try to turn off that financial news, and enjoy the summer. If you are watching the market, whether it's going down or up, call us, and we'll see what we can do to help you ignore it.
1. Here is a newsletter from me warning about inflation risk to investors, in December 2018. Finance works in cycles, and after a quarter century of little inflation, people were forgetting about it.
2. An article on reducing unsystematic risk.
3. St. Louis Fed checkable deposits
4. There is a perception forming that interest rates, while not high, are "more normal." They're not normal yet, they're still low, though people are anticipating that they will be normal, and maybe even high. Here is the chart of the Federal Funds Rate.
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