Downturns are not enjoyable and can create larger bumps in the road, but if we look further on, time, eventually, seems to be our friend.
“Ob-La-Di, Ob-La-Da, Life goes on” – The Beatles
Jim Shellenberger, CFA | Financial Advisor
If the markets could speak, I envision them sounding something like “Ob-La-Di, Ob-La-Da.” A melody of certainty yet words open to interpretation. In this beloved song, we don’t get caught up with worrying about what “Ob-La-Di, Ob-La-Da” means but instead sing along as if no one is listening. The investment markets often act irrationally, and if we only look at short time periods, they rarely make sense. We shouldn’t get frustrated with trying to make sense of the short-term moves. The markets will leave you crazy if you are too focused on what you should or should not have done. The goal is to make wise decisions, but you will never have perfect timing and knowledge of the markets. Here are some points to remember, so we don’t get frustrated when the markets sound like “Ob-La-Di, Ob-La-Da.”
Nothing is constant. In an ideal world, a portfolio would move up at a steady rate over time. We would love for the experience not to be rife with ups and downs. Unfortunately, that is not reality. The chart below shows the movement of a 60/40 portfolio: 60% S&P 500® and 40% Barclays Aggregate. The orange line is the 60/40 portfolio, and the blue line is the constant growth portfolio. You can see how the orange line has many ups and downs. It’s a bumpy ride almost the entire 40-year time period. Every downturn left investors with fear and uncertainty. When we are in the middle of the bumps, it gets scary, and it is hard to remember that we are getting to the same destination as the blue line. The optimist would say, “We just get a thrill ride the way there.” Uncertainty and fear will most likely always exist in the markets, but overall, historically, the markets have had a bias upwards. This portfolio went from $100 to about $5,000 in about 40 years: a bumpy ride but a relatively good outcome in the end.
Recessions are unpredictable. Every downturn in the past has been unique to what caused it, and, subsequently, the route taken by the markets to adjust and recover is also unique. Unfortunately, recessions get even bumpier. Below is a chart of a 60/40 portfolio during the tech bust of the early 2000s. From peak to the bottom, this portfolio would have lost about 23%. You can see that it was not a quick and direct path to the bottom. It took about two years. It is quite troubling when your portfolio has been up and down (mostly down) for a year and a half, and then, to top that off, the most significant drawdown of the recession, one of 15%, hits at the end. Unfortunately, it is currently possible that we may test the “bottom” we experienced in March.
It is not out of the realm of possibility. However, we could also have an experience similar to what we saw in 1987 when the S&P 500® went down and right back up. It created a nice “v-shaped” downturn and recovery. Even though an experience like the tech bust is disturbing and hard to see through, things turned out well in the end. This 60/40 portfolio has more than doubled since the beginning of the tech bust. Once again, a bumpy road but a rather good eventual outcome.
Time seems to heal wounds. If we focus on the long-term, things get less scary. If we only focus on the short-term, downturns are frightening. Counter to our initial feeling of fear, it is possible that they produce long-term buying opportunities. Let us look at a 60/40 portfolio during three notable downturns in the last 40 years.
The point to note is that the 5-year cumulative return and the 10-year cumulative return start the month the downturn began. That means that for the 1987 downturn, the 5-year cumulative return of 62% includes the 17% drawdown from the initial peak to bottom. No investor wants to see their 60/40 portfolio down 17-33%; however, the silver lining is if we look five to ten years out from the start of these downturns, we still had a positive return. The least impressive returns are for the tech bust. One thing to consider is that tech bust took 25 months to get to the bottom and 25 months to get to a new high. This means that 50 months of the 5-year (60 months) cumulative return was downturn and recovery. Another thing to consider for the 10-year cumulative return is that the tail end of that 10-year return overlaps with the 2008 financial crisis, yet it was still able to return 22%. Downturns are not enjoyable and can create larger bumps in the road, but if we look further on, time, eventually, seems to be our friend. They have the potential to end up being buying opportunities, though it is generally wise to proceed with care.
A bumpy road is never fun, but when we get to where we are going, we tend to forget about the road and remember the destination. Unfortunately, we will always experience volatility in investments, but instead of always viewing them as a nuisance, we should try to see them as long-term opportunities. In the long run, these downturns can become good buying opportunities. We are currently in the “middle” of a downturn. We can hope it works similar to the 1987 downturn and makes a nice “v-shaped” recovery, but we also need to prepare that it could act more like the tech bust. If we end up testing lows from earlier in the year, know it is part of the journey and remember, its a marathon, not a sprint.
First and foremost, prepare as if things could get worse and know what you will do. Have a backup plan. It is better to be prepared and have nothing happen than to live, hoping that nothing will happen and be caught off-guard. Even though things may sound like “Ob-La-Di, Ob-La-Da” in the short term, remember “life goes on,” and things generally work out for the best, in the long run.
Ready to talk?
Please reach out to set up an appointment.
Past performance is no guarantee of future returns. Performance discussed represents total returns that include income, realized and unrealized gains and losses. Nothing presented herein is or is intended to constitute investment advice or recommendations to buy or sell any types of securities and no investment decision should be made based solely on information provided herein. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for an s investor’s financial situation or risk tolerance. Diversification and asset allocation do not ensure a profit or protect against a loss. All performance results should be considered in light of the market and economic conditions that prevailed at the time those results were generated. Before investing, consider investment objectives, risks, fees and expenses. All calculations of performance are by Frontier.
Information provided herein reflects Frontier’s views as of the date of this newsletter and can change at any time without notice. Frontier obtained some of the information provided herein from third party sources believed to be reliable, but it is not guaranteed, and Frontier does not warrant or guarantee the accuracy or completeness of such information. The use of such sources does not constitute an endorsement. Data sources for funds and indices is Morningstar.
Exclusive reliance on the information herein is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell any securities, commodities, treasuries or financial instruments of any kind. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal, investment or tax advice.
Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision.
In reviewing the performance information presented here, we recommend that you consider both the returns generated and the level of risk that was assumed in generating those results. We believe that performance information cannot be properly assessed without understanding the amount of risk that was taken in delivering that performance. The performance information presented here covers different time periods. We present performance information for short time periods because we understand that clients and potential Investors are interested in this information, however, we recommend against making any investment decisions based on short-term performance information. For any investment products mentioned herein, a complete description of their investment objectives, along with details of the risks and fees involved is contained in their respective prospectus and statement of additional information, which is available on their websites and should be read fully.
It is generally not possible to invest directly in an index. Exposure to an asset class or trading strategy or other category represented by an index is only available through third party investable instruments (if any) based on that index.
|S&P 500||Represents U.S. large company stocks. It is a market-value-weighted index of 500 stocks that are traded on the NYSE, AMEX, and NASDAQ|
|Barclays US Aggregate Bond||Measures the performance of the U.S. investment grade bonds market. The securities must have at least one year remaining to maturity, must be denominated in U.S. dollars and must be fixed rate, nonconvertible and taxable.|
Frontier’s ADV Brochure is available at no charge by request at email@example.com or 307.673.5675.
Frontier’s uses of external sources in no way be considered an endorsement. Reader accesses sources at their own risk. Frontier is not responsible for any adverse outcomes from sources provided and cannot guarantee their safety. Frontier does not have a position on the contents of site sources. Frontier does not have an affiliation with any author, company or security noted within. Frontier reserves the right to remove these links at any time without notice. 063021CST063022