Kevin Bacon and Sidelined Cash – 2Q2022
As 80s heartthrob, loose-footed, and distant-relative-to-all Kevin Bacon asked in the classic 1978 comedy Animal House (based on Harold Ramis’ experience at my alma mater WashU), “Thank you, sir, may I have another?” After a difficult 1st quarter, the US markets delivered another blow to investor portfolios, ending the first half of the year down over 21%, and international markets trailing just behind at over 19% down. Fortunately for the well-diversified, bonds lost “only half” of that, with the aggregate index down just over 10% during the same time period: please hold while I celebrate. Perhaps I should take another look at Dogecoin?
In last quarter’s newsletter I made three predictions: volatility would continue, growth would slow (recession) while inflation remained high (stagflation), and that it would be prudent to reduce duration in your fixed income portfolios. At the risk of lowering my batting average to .750, I’m predicting the volatility will continue, though given the market turbulence that hardly even seems like an at-bat!
So what does a savvy, long term investor (read: lazy, boring, index-like) do in this kind of market? If you’ve been sitting on the sidelines in cash for the past couple of months (or years) waiting for the market to sell-off, perhaps the 20% losses in the first half of the year will qualify? A quick search for cash on the sidelines revealed cash is at or near a record high, exceeding that of 2001 and 2009. Spoiler alert; another quick search for best times to invest over the past 25 years may have produced the same results! Sitting in cash is hard, and even harder when that cash is losing 7-9% per year in real purchasing power due to inflation (as the numbers released earlier this week indicate). That’s not to say a pre-retiree or someone just entering retirement shouldn’t have a couple years of cash or short term bonds, but people who are unlikely to use all of their money in their lifetime, and those just trying to time the best entry point may be better served to begin moving back in. And yes, I’ve advocated moving back into the markets from sidelined cash for years, though it’s even more attractive today.
Investing is not easy, but it is simple, and as I’ve written numerous times, if you have a long enough time horizon, these selloffs will be smoothed out. If you don’t have more than a few years, that money should not be invested in equities. Remember that expected returns (future performance) are higher after a 20% selloff than they were prior to the selloff. As the market goes down, risk goes down.
Stay the course and buckle up for the second half of 2022.