One of the most important aspects of our investment strategy at ML&R Wealth Management is our long-term approach. This applies not only to the way we invest our clients’ assets, but also to the market research and evidence that forms the bedrock of our investment philosophy. We fully understand the impulse to question your investment plan and react to short-term volatility and current events. However, we know from studying investor behavior and the history of the stock market that changing your investment plan midstream as a reaction to short-term volatility can be a recipe for failure. Let’s explore a couple of real-world examples that illustrate the importance of maintaining a long-term investment strategy.
Through June 30th of this year, the S&P 500 Index declined almost -20% in the first half of 2022, and was the index’s worst first half start to a calendar year since 1970. For younger, emotional or less experienced investors, this can tempt them to abandon their stocks for the “safety” of bonds or cash, until the market recovers.* However, selling stocks after they have declined is the opposite of what we should be doing as long-term investors. *The safe haven bonds usually provide during stock corrections has also vanished so far this year, with US bond market returns down -10.35% through June 30th. And with inflation at over 8%, the purchasing power of uninvested cash can erode quickly.
Instead, we want to buy equities when they are relatively inexpensive, and hold them for long periods of time in a structured portfolio. Much later down the road we should be able to sell them for a profit, using the cash proceeds to fund our financial goals like retirement (buy low & sell high). For over 95 years, the stock market has returned an average of about 10% annually, and is generally up about 75% of the time. However, this means it is down about 25% of the time (or roughly 1 out of every 4 years). In order to get the long-term 10% average annual return, we have to stay invested through the volatile times, and not abandon our plan.
Sometimes people like to believe they can time the market and pick the perfect time to invest new money. They may think the market is about to decline soon, so they want to wait until after the anticipated correction and buy stocks cheaper. As mentioned above though, the market is up about 75% of the time, so we advise our clients that we should always assume the best time to invest new money is now. If someone acquired $100,000 on June 15th of this year and decided to sit on cash expecting the market to decline further, they may be sorry now that they did not invest it then.
This may come as a (pleasant) surprise to some, but since June 16th the S&P 500 Index is up 15% through August 15th from its recent bottom, showing once again that the stock market is very unpredictable in the short-term. Also, the evidence shows that the difference between the performance of the S&P 500 Index is only about 0.5% greater five years after new market highs than five years after 10% declines. In other words, the timing of when you buy stocks has been virtually irrelevant five years later.
Our long-term investment approach means that we have a plan for our clients’ portfolios well in advance of any short-term market volatility or news cycles. At ML&R Wealth Management, we focus on owning the 8 or 9 primary asset classes represented in very diversified, low-cost mutual funds that we know have historically done well at some point, over the long-term. Since these asset classes don’t perform in tandem, market volatility often gives us opportunities to rebalance our client portfolios and invest in some of the asset classes at relatively low prices, and sell a portion of the ones that have done well recently (again, buy low & sell high). Another important long-term aspect of our planning is that we always want to make sure our clients have plenty of cash to meet their spending needs, whether before or during retirement. That way they can avoid having to sell an asset for a loss if the market happens to be down when they need cash.
Our long-term, evidence-based approach allows us to remind our clients that we have a reliable investment plan for them, and that they can tune out and ignore the endless barrage of negative news, and focus on what matters. If you would like to discuss working with one of our Austin financial advisors to create a plan with you, please contact us.