What to Watch: The Case for Remaining Invested
What to Watch

October 28, 2022

The Case for Remaining Invested

Equity and bond correlations have reached levels that we have not seen since the late 1990s due to restrictive monetary policy, rising interest rates and stubbornly high inflation. The shared risks between the equity and fixed income markets have challenged the returns of a diversified 60/40 portfolio which has fallen about 20% year-to-date. In dollar terms, a $5 million 60/40 portfolio at the beginning of the year is now only worth $4 million, given the drawdown. For individuals in, or approaching retirement, this drawdown has already translated into a meaningful decrease in potential income, and the fear of further losses has many running to cash. Despite continued market uncertainty and near-term drawdown risks, we believe cautiously remaining invested is important. Here are a few reasons why:

Source: Bloomberg LP, Indices used: S&P 500 as a proxy for U.S. Equities, Bloomberg US Aggregate Bond Index for U.S. Investment Grade Fixed Income. Data from 12/31/2021 – 10/22/2022. Past performance is not indicative of future results.

Missing the Top Days May Lead to Long-Term Portfolio Damage

As shown in the chart below, missing the top returning days can be costly. Over the previous ten years, missing the top performing day alone would have cost a $1 million portfolio about $300k in compounded returns. And the more days missed, the more the portfolio suffers. Missing the five best days would have resulted in $900k in lost value, and missing the ten best would have cost $1.3 million.

Source: Bloomberg LP. S&P 500 daily data from 9/30/2012 – 9/30/2022. Past performance is not indicative of future results.

Best and Worst Performing Days Often Fall Near One Another

The best days also tend to happen when the market is most volatile. Looking at the best day over the past 25 years, 32% took place within 10 days of the worst day. Needless to say, few investors are nimble or lucky enough to shift portfolios in such short time spans.

Source: Bloomberg LP, S&P 500 daily data from 12/31/1998 – 9/30/2022. *Note: 2022 goes through 9/30/2022. Past performance is not indicative of future results.

We believe investors on the sidelines are looking to re-enter the market when the dust settles and they feel safe, although this may be very challenging with indicators showing a wide range of metrics. Investors need to find ways to stay invested, knowing that the market finishes in the black more often than in the red.

High Inflation, Aggressive Fed, Three Recessions, 128% Total Return

Looking back to the 1970s-1980s, the last period of high inflation in the US, the equity market rewarded investors that stayed invested. From the beginning of 1972, when inflation began to accelerate, through the end of 1982, when inflation started to decline, the S&P 500 Index returned 128%, or just under 8% per year. While there were spurts of high volatility and large drawdowns, investors that stayed invested were rewarded.

Source: Bloomberg LP. Monthly data 12/31/1971 – 12/31/1982. Headline CPI = Headline Consumer Price Index.

The Bottom Line

We believe staying invested is the best approach for creating wealth, and regaining wealth after a drawdown. While investors with a shorter time horizon may find it difficult to stomach additional losses, utilizing a buffered equity or managed floor strategy may be a viable strategy to maintain exposure to the equity market and not miss the best days.

Equity and bond correlation refers to the degree to which equities and bonds move in relation to each other.

A 60/40 portfolio refers to 60% of your portfolio in stocks and 40% in bonds.

The Bloomberg US Aggregate Bond Index measures the performance of the U.S. dollar denominated investment grade bond market.

CPI, or Consumer Price Index, measures the overall change in consumer prices based on a representative basket of goods and services over time.

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