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This Time It's Different?

This Time It's Different?

February 21, 2022

During the recession of 1954, Sir John Templeton wrote a letter to clients where he stated that the four most dangerous words in investing are “this time it’s different.” At stock market tops and bottoms, investors invariably use this rationale to justify their emotionally driven decisions. This sentiment holds as true in 2022 as it did in 1954. Current concerns regarding Russia invading Ukraine, the Federal reserve raising interest rates, and the end to Quantitative Easing have caused an increase in market volatility, and an early year selloff.

While all these factors are worth consideration in portfolio positioning for the future, these factors are insufficient to suggest a move to cash to wait for better days again. The challenge of selling investments in favor of cash is that it also requires timing the re-entry into investments. The best time to re-enter the market, of course, is when things are at their worst. Precisely the moment in time when you would be most comfortable with your money in cash would be the opportune time to buy into equities. In many instances, investors that exit their investments during market pullbacks often wait to buy back in until after the market is higher than when they originally sold.

A recent study by DALBAR*, a financial research firm has shown how
the general temptation for investors to try and time the stock market
often results in the investor diving into the market at the top and
fleeing at the bottom. This activity has caused investors results to
significantly lag the broader markets over the long haul. This chart
illustrates that, rather than following trends during market highs and
lows, investors may be better served by staying invested during all
stages of the market.

Seeing monthly statements with red ink is never fun. However, changing the perception from one of concern over lost value, to one that focuses on continuing to own companies that are projected to increase earnings can help us take the emotion out of the investment decisions. Analysts are forecasting earnings growth between 7-10% this year and another 10% next year. If you had a nice rental property with increasing rents and stable occupancy, would you be inclined to sell it when the real estate prices dropped? Price only matters when you decide to sell. Understanding that your portfolio investments have similar characteristics to investment real estate may help with the decision-making process.

We recommend an investment strategy that seeks to provide investors the capacity to ride out the ups and downs of market price fluctuations to avoid selling during market pullbacks. This investment strategy includes a low-risk investment sleeve that is specifically designed for income distributions, minimizing the need to sell equities in down markets.

*Returns for average equity and fixed-income investors calculated by DALBAR. DALBAR uses data from the Investment Company Institute (ICI), Standard & Poor’s, Bloomberg Barclays Indices and proprietary sources to compare mutual fund investor returns to an appropriate set of benchmarks. The study utilizes mutual fund sales, redemptions and exchanges each month as the measure of investor behavior. These behaviors reflect the “average investor.” Based on this behavior, the analysis calculates the “average investor return” for various periods. These results are then compared to the returns of respective indexes. Ending values for the indexes and hypothetical equity and fixed-income investor investments are based on average annual total returns. Standard & Poor’s 500 Index is a market capitalization-weighted index based on the results of 500 widely held common stocks. Bloomberg Barclays U.S. Aggregate Index represents the U.S. investment-grade fixed-rate bond market and consists of U.S. Treasury and government-related bonds, corporate securities and asset-backed securities. Figures shown are past results and are not predictive of results in future periods. The market indexes are unmanaged and, therefore, have no expenses. Their results include reinvested distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or taxes. Investors cannot invest directly in an index.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Stock investing includes risks, including fluctuating prices and loss of principal.

Bond are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.