Streetwise for Sunday, August 29, 2021

Contrary to what some might think, life as a professional portfolio manager is not a walk in the park. To start with you are often required to counter certain ingrained ideas held by many investors despite their lack of quantitative validity. In fact, the stubbornness of many investors can be downright frustrating.

For example, one stalwart belief is that you should always hold a 60/40 portfolio with 60% in stocks and 40% in bonds, or vice versa depending on who is giving the investment advice. This idea is so fervently held to that trying to counteract it is equivalent to crashing into a brick wall.

Nonetheless, with yields on long-term Treasuries near all-time lows, the chorus of naysayers toward the so-called 60/40 portfolio has grown. The criticism is based on the grounds that you are not being paid much to hold bonds and capital appreciation is going to be almost nonexistent.

Yes, in the past bonds and stocks tended to move inversely to each other. When people are bullish on risky assets i.e., stocks, they tend to lighten up on safe-haven Treasuries.

On the other hand, when investors are fearful and stocks are tanking, Treasuries tend to do well. This nice inverse correlation dampened volatility for the portfolio overall. But that was then, and this is now.

With interest rates at unimaginable lows and the Federal Reserve indicating that it will likely maintain that stance for some time to come, fixed income securities could easily be left out of any contrived mix of securities in a portfolio and their absence would hardly be noticed.

Next up is the conflagration that refuses to die a peaceful death. Specifically, what would happen if the equity markets totally collapsed. Would that not result in a total loss if a portfolio were comprised of, or heavily weighted towards equities?

The short-form answer is no, of course not. After about 50 years on the Street, weathering a variety of economic and investment cycles, I believe that I can say from experience that any time an individual has sustained a devastating loss, there would be considerable difficulty in attributing the loss to an aberration of market activity.

Every case I have been brought in to review, and there have not been that many, the fault lay with a combination of insufficient knowledge or a surplus of greed on the part of an advisor, the investor, or some combination thereof.

On a more productive note, there remains an ongoing need to continually allay investors’ fears of a market crash. Such fears lead investors to mistakenly believe that to stave off such a calamity would be to move into cash or bonds. Let me repeat, in today’s investment environment those would be he two worst choices.

Financial markets are buffeted by events of every nature, in much the same way that a sailboat finds itself at the mercy of the wind. Moreover, it is not unusual for the resulting volatility to reach melodramatic proportions. That is the nature of the beast.

Meanwhile, Wall Street is inherently forward-looking. Anticipation, rather than actuality, often takes precedence in investors’ minds. Aiding and abetting that anticipation is the disappointment regarding the future of the economy that has dominated Wall Street in recent months.

However, if Wall Street is anything it is fickle and investor sentiment can reverse in the blink of an eye. So, it is no surprise that mass hysteria, either positive or negative, can wrap its icy grip around Wall Street and drive stock prices well beyond reasonable trading parameters.

So, let us cut to the quick. Stop worrying and invest using a modicum of common sense. Remember, 100 percent of the 5 percent corrections in stock market history were followed by a higher high. Moreover, 100 percent of the 10 percent corrections in stock market history were followed by a higher high.

And at some point, during 20 of the last 37 years, the equity markets have seen a peak-to-trough decline of at least 10 percent. These episodes always trigger anxiety and suddenly everyone is searching for the exits. Yet, the bounce back is generally quick. Stocks have posted full-year declines in just 6 of those 20 years.

Lauren Rudd is a Managing Director with Raymond James & Associates, Inc., member NYSE/SIPC. Contact him at 941-706-3449 or Lauren.Rudd@RaymondJames.com. All opinions are solely those of the author. This material is provided for informational purposes only, is not a recommendation and should not be relied on for investment decisions. Investing involves risk and you may incur a loss regardless of strategy selected. Past performance is no guarantee of future results.