Don’t believe everything you read. In 1979, the cover of Business Week proclaimed the “Death of Equities: How Inflation is destroying the stock market.” The article explained that inflation was rising, and smaller investors were abandoning stocks in droves, mainly because equity investments could not keep pace with cost-of-living increases. Sound familiar? At the time, inflation was running greater than 11%, while the S&P 500 index had an annual return of 1% in 1978 and negative 11% in 1977. Fortunately, the magazine cover was perhaps a contra-indicator that equities were alive and well. That same year, the S&P 500 bounced back and the rest, as they say, is history.
Even with all the expertise and resources at our disposal, predicting the future outcomes of financial markets can be notoriously tricky. This is where the concept of diversification is helpful. By diversifying investments across asset classes and industry sectors, you can spread your risk and avoid putting all your eggs in one basket. If one sector or asset class does poorly, others can still perform well.
As always, markets are subject to a wide range of variables and risks that can affect their performance. However, it’s important to note that successful investing over the long-term requires a well-thought-out plan, a diversified portfolio that fits your risk tolerance and goals, and a disciplined approach to sticking to that plan through good and bad times. Just think of those Business Week readers in 1979 that heeded the cover’s advice. They would have missed a +18.5% return that year, and the +31% returned the following year in 1980.
Many today are tempted to throw in the towel on equities and turn to the yields offered by short-term T-bills, which can be a good investment option for short-term funds or as a haven during market downturns. Still, they should be only a portion of a well-diversified investment portfolio. In the long term, investments like U.S. treasuries offer lower returns than investments such as equities. Matching your investments to your investment time horizon is essential. If you have a short-term investment horizon, a proportion of short-term assets like T-bills may be a good fit as you prioritize preserving capital over generating long-term returns. Investing in a greater proportion of equities would be a better option if your investment horizon is long-term, as they have provided higher returns over extended periods. Or, a combination of both could be a very nice allocation. We often preserve several years of client’s cash flow needs in high-quality corporate bonds and invest the rest of the assets for the long-term in our equity portfolios. This allows your equities to grow at the higher long-term rates of return, while maintaining your short-term cash flow needs in the safer, yet lower returning asset class provided by high-quality bonds, U.S. Treasuries and/or CDs.
It’s understandable to feel concerned about the current economic climate, particularly with rising inflation and talk of recession. However, evaluating equities based on fundamental analysis and considering long-term investment goals is crucial. Equities have historically offered higher returns than other asset classes, such as bonds, U.S. treasuries, CDs, and cash, over the long-term and have acted as an effective hedge against inflation in the past. Furthermore, last year’s downturn provided opportunities to purchase lower-priced quality companies equities. We added new names last year and two new names to the portfolios this year, expecting further additions as we move forward.
As always, we appreciate your confidence in Cardinal Capital. We welcome the opportunity to meet with you to discuss your portfolios at your convenience.
