January 2023
Investors: The market feels very risky right now. With inflation still very high, and the Federal Reserve aggressively raising rates, I’ll play it safe and invest in short duration treasuries yielding a risk-free 5%.
Stock market: LOL
At first glance, investing in non-volatile assets in response to an unstable and risky market may seem sensible. But it brings to mind one of Warren Buffet’s best pieces of investment advice: “Be greedy when others are fearful, and fearful when others are greedy.” This is the essence of successful investing; take advantage of opportunities when others are too apprehensive to seize them.
At the close of 2022, Wall Street had weathered a backbreaking annual percentage drop. The S &P market cap, the Dow, and Nasdaq fell drastically. It was a year of sharp losses and hefty interest rate hikes. Investors ran scared and turned risk-averse. They abandoned the market and went into safe, predictable government treasuries – investments that promised no variations in outcomes and no surprises.
In hindsight, we can see that the market bottomed on October 13th, 2022, a day when the Consumer Price Index (CPI) came in much higher than expected, with inflation running at 8.2% year over year. By that time, the Federal Reserve had already raised rates five times, with three consecutive hikes of 75 basis points; and they showed no sign of stopping until the inflation was under control.
Curiously, on that day, the market opened down by 1.5% and then, against all odds, managed to close with a 2.5% increase. At that point the market was down about 26% from previous highs. Since then, the market has risen 23% and is only a small percent away from reaching its previous highs. This unpredictability highlights the cruel irony of the market: it tends to be forward-looking and often thrives when things seem bleak on Main Street.
It’s natural for the investor to feel the need to run for cover in a volatile market. But historically, from an investment perspective, it’s always better to stay the course. Investors that abandoned the market after 2022’s debacle are still left with their stable government treasuries, while those who were able to endure the risk are now reaping higher returns. Had those timid investors remained invested, their shares would have ridden the waves and ended up high with the market.
From our vantage point at Equinum, we often witness how emotions play on an investor’s ability to make effective decisions. From our conversations with clients and prospects, we have seen patterns emerge: When investors are comfortable they tend to invest more, and when they are hesitant, they bail out – often counterproductively. Moving in and out of the market based on feelings is never a sound approach in the long-run.
As advisors, we are tasked with keeping our clients’ emotions level through both the good times and the uncertain ones. And given people’s innate tendency to make the wrong decisions when investing, it becomes crucial to adopt a big-picture approach and remain invested for the long haul. Emotional reactions to short-term fluctuations can lead to impulsive actions that may not align with one’s overall financial goals.
For more information, please reach out to us at info@equinum.com.
