The double whammy...

I often feel like we are the investment double whammy generation…falling stock prices coupled with falling bond prices. For decades the traditional 60/40 (stock/bond) portfolio was the mainstay of institutional portfolio managers who were managing on behalf of pensions and endowments a portfolio that balanced the needs of their current retirees (bonds) with the necessity of providing growth (stocks) for future retirees. The added advantage of this allocation was the (traditionally) inverse relationship of stocks and bonds. As the stock market became volatile and values went down…money would leave for the safety of the bond market and that demand would drive up bond prices…buffering the total portfolio from the volatility the stock market was creating. Couple this with the fact we (this generation of investors) were in the middle of a 40-year cyclical downturn in interest rates, which concurrently raised bond prices. Not that we haven’t had these kinds of bond price declines in the past…2009 was very similar…but back then we were in the middle of the Great Recession and (a) we were worried about our financial survival with prices a distant secondary concern; and (b) that was thirteen years ago and as discussed in previous newsletters, our brains take our most recent history and extrapolate that to be our forever future. But, a quick review of returns since 2009 shows us a 20+ year Treasury Bond fund returned 2.5X* your investment, and the S&P 500 6.7X*.

If history repeats itself, at some point in the future interest rates will go down, and bond prices will rise. The same hold trues of the stock market…only one time in the last 45 years has the market had three down years in a row (2000-2002), and in this same 45-year period, with the exception of 2000-2002, there hasn’t been any down period of two years in a row.

What is the lesson here? Know your history…it helps you stay focused on your investment horizon and not panic in periods of market volatility. Recognize there is a reason your portfolio is diversified; the different asset classes are the building blocks of portfolio performance. Understand that asset allocation is assembling the parts into the whole to take advantage of diversification. Finally, take advantage of what you can control, patience (know your history), diversification, and asset allocation for strategic long-term planning across different macroeconomic and market scenarios. As always, we are grateful for your business and friendship. Sincerely,

Dave & Drew

*Returns are based on the S&P 500 Total Return Index, an unmanaged, capitalization-weighted index that measures the performance of 500 large capitalization domestic stocks representing all major industries; and TLT, the iShare 20+ year Treasury Bond ETF. Source: PortfolioVisualizer.com. There are risks associated with investing in securities. Investing in stocks, bonds, exchange traded funds, mutual funds, and money market funds involve risk of loss. Loss of principal is possible. A security’s or a firm’s past investment performance is not a guarantee or predictor of future investment performance.