Sometimes, quarterly reports are as green as a hippie’s pocket lining. Share prices are heading to the top right of the chart and so is the wealth of our clients. Most client calls are positive and based on adding to successful and growing accounts.
Market cycles are unfortunately a reality, so all good things must come to an end, if only for a while. It takes a strong stomach to withstand market volatility, especially when investing in assets that offer great long-term growth. Remember, without risk there is no reward.
This is the pendulum. It can sometimes feel like an axe.
At Heritage Wealth Partners, we love the upswings, but they do cause headaches. We wonder about when things might take a breather and to what extent that could happen. This makes asset allocation difficult, as being too conservative can leave significant gains on the table and being too greedy can result in nasty decreases in value.
We won’t use the word “loss” here, as a loss is only crystallised if you sell your position. This is a key point in investing. Charging into the market right at the top and panic selling at the bottom is a guaranteed way to destroy wealth.
We feel the pain with you, though. It has been proven that a 15% gain isn’t rewarding enough to offset the emotions of a 15% decrease in value.
Our job at Heritage Wealth Partners is to guide you as our client through this journey in the least stressful way possible, whilst extracting the maximum return from your investments.
As valuations skyrocketed in the latter half of 2021, we allocated most new client investments to cash or bonds. Our Advanced Retirement Fund sold some equity and increased bond exposure for yield, while holding a higher proportion of cash to be conservative.
In late 2021, our portfolios were the most conservative they have been for over a decade. We were right about the pullback, but we were surprised by just how severe it has been. This isn’t just a growth stock issue either, as the term “nowhere to hide” has been the theme of the past few months. Our view for current valuations is now bullish and we believe that patient investors will reap significant gains from these levels.
Since mid-November, the S&P500 has lost around 18% of its value and the Nasdaq composite is down over 30%. The average share on the Nasdaq Composite is down more than 45%. Even the world’s leading tech companies have seen a sharp decrease in their values.
For context, Walmart lost 20% of its value in one day based on a recent earnings release. Walmart. This is a strong indication of how difficult this inflationary environment has become for equities.
Source: Anchor Capital – May 2022
After enjoying positive client calls in 2021, this year has dished up a great deal of nervousness and even panic among our clients. This is perfectly understandable and a normal way to feel when faced with these numbers. Most of our calls are spent reassuring clients that the world hasn’t ended and that markets are not in perpetual free fall.
Successful investing is often counterintuitive. When stocks become hated, it is often the right time to buy. When everything feels like it could go up forever, experienced investors become nervous.
At these market prices, we are now significantly increasing our exposure to growth assets like equities. The most difficult choice we face is which equities to buy.
To understand why an equity allocation is important in these times, we can look back to 1998 when the S&P 500 was at around 1,100 points before peaking in the year 2000 at just over 1,500 points, a run of around 35% over a couple of years. This was when the “dot-com” craziness hit the world as people started to wrap their minds around the potential of the internet. Roughly two years later, one of the worst market crashes in history bottomed at 815 points on the S&P 500. In four years, portfolios gained 35% before ending up 20% lower than where they started.
After a journey like that, many investors headed for the exit. This kind of investor apathy is a strong buy signal for equities.
Although there were some more tough years in the aftermath of the crash (not least of all the Global Financial Crisis which knocked the market all the way back to Dot-Com crash levels), an investor who held over that period has achieved a return of 4x the starting value.
Source: Yahoo Finance
The S&P 500 is broad market exposure. If we focus on technology, which has clearly been the place to play in the past two decades, we are effectively investing in the extent to which the world has changed since 1998.
The S&P 500’s increase of 4x over that period is dwarfed by the Nasdaq Composite with a 7x return over the same period:
Source: Yahoo Finance
Investing in equities can be a rollercoaster ride of emotions. We know and understand that, which is why we react to what we see in the markets to the best of our ability and assist you in managing your emotions along the way.
The markets are a pendulum, not an axe. Often, the right approach is the counterintuitive one. There’s nothing more cliché than a Warren Buffett quote, but this one simply cannot be beaten:
“Be fearful when others are greedy. Be greedy when others are fearful.”