With declines for both equities and bonds this year resulting in a 16% year-to-date total return loss (as of the end of November) for balanced portfolios, some investors might think they have good reasons to leave the market.
But exiting investments now would mean realizing the loss and missing out on a potential market recovery.
We have identified 10 reasons why investors should put cash to work, even in times of uncertainty.
- Stocks and bonds have very rarely fallen at the same time: While this scenario has materialized this year, data since 1926 show that only 2% of the time have stocks and bonds both fallen over a 12-month period, meaning this is a rare occurrence in the long-term.
- Negative sentiment is not a good reason to leave the market: Returns have been strong in the wake of previous stock-bond losses, with a 60/40 portfolio yielding 12% on average in the following 12 months 81% of the time.
- Market timing is expensive and risky: Historically, a market timing strategy, in which the investor would wait for a 10% drop to re-enter the market, has performed poorly compared to a buy-and-hold strategy.
- Staying invested pays off, especially in the long term: Cash and bonds are appropriate for spending needed in the next 3-5 years, to avoid having to lock in otherwise temporary stock market losses. A diversified portfolio is more suitable for assets earmarked for spending in the next 10-15 years.
- Cash is a poor investment: Cash has seen poor returns in recent years as rates were low, even when inflation was relatively tame. Now, high inflation is eroding the purchasing power of cash, despite rising rates.
- Bonds reduce portfolio stress better than cash: Different periods of crisis illustrate that bonds are better diversifiers than cash. Bonds tend to be more resilient when equity markets fall. If the economy does experience a “hard landing” in 2023, we would expect bond prices to rally significantly, providing a buffer against further stock market losses.
- Higher yields should enhance returns in a diversified portfolio: Income is starting to return to fixed income, as expected returns are improving with higher yields. Historically, subsequent returns have been stronger with higher yields at the time of investment.
- Hedging strategies can cushion the downside: Broader diversification further reduces risk. In times of higher inflation or elevated geopolitical risk, commodities can be a powerful diversifier.
- Dynamic asset allocation could help protect against losses: Strategies such as dynamic asset allocation can be more effective than cash as protection against losses, without the high cost of missing out on growth potential. Dynamic asset allocation strategies work by adjusting the portfolio’s equity risk exposure systematically—especially by moving some equity exposure into fixed income when risk is increasing. As such, investors can manage the risk of significant declines in exchange for sacrificing some upside potential if markets stage a swift recovery.
- The true risk is failing to meet investment goals: The real risk that investors face is failing to meet their goals. It’s important to position a portfolio based on purpose, as laid out in our Liquidity. Longevity. Legacy.* framework. This strategy can be indispensable, especially in times of market disruption, because it helps investors avoid behavioral biases, and stay focused on long-term goals rather than being driven by short-term reactions.
So, before leaving the market, we think investors should keep these 10 points in mind.
Read more in our new presentation here (published 6 December 2022)
*Timeframes may vary. Strategies are subject to individual client goals, objectives and suitability. This approach is not a promise or guarantee that wealth, or any financial results, can or will be achieved.