Why shouldn’t I just put all my money in the S&P 500?
Welcome to the February 2022 Newsletter!
Firm update: Dalton and I continue to the process of updating the Marketing name from Cedar Wealth Partners (which Dave is a founding partner) to Hobbs Wealth Advisors. As I’ve mentioned before, this is simply a name update to more clearly distinguish the services Dalton and I provide as compared to the broader Cedar Wealth firm. We’ll still be using the same processes we’ve used throughout the years.
What we do at Hobbs Wealth Advisors: We work towards helping clients to stop second guessing their financial decisions, reducing and in some cases eliminating financial anxiety. We never try and predict the future or the markets, we can only control our response to outside stimuli. Clients of Hobbs Wealth Advisors are goal-focused, long-term, globally diversified, strategic investors who are seeking to be excellent stewards with their wealth.
Index Update (As of 01/31/2022 from Yahoo Finance)
S&P 500 (Large Cap): +21.48 YOY | -9.73% (1/4/22 – 1/27/22) | +9.33% 20 Year Return
Russell 2000 (Mid, Small Cap): -4.72% YOY | -14.99% (1/4/22 – 1/27/22) | +8.90% 20 Year Return
Global Market – ex US: +3.34% YOY | -5.06% (1/4/22 – 1/27/22) | +7.71% 20 Year Return
1. Why shouldn’t I just put all my money in the S&P 500? This has been the most common question we’ve heard over the past few months. If you don’t actively follow the investment markets, just take a glance at the past 1 year return of the S&P 500 versus other indexes.
With hindsight being 20/20, I wish every dollar of every client’s assets, including mine, were in the S&P 500. And not just last year, but over the past 13 years! The S&P 500 has been on a historic growth path since the bottom of the financial recession, averaging an eye-popping 17% annualized since March 2009 to Feb 2022. This is well above the 25 year average of the S&P, which is still a wonderful return at 9.12%.
So pause for a minute and re-read that. The 25 year average is 9.12% and the 13 year average is 17%. Why is there an 8% delta (difference)? What was different in years 1997-2009 compared to years 2009-2022?
The initial question of, “Why shouldn’t I just put all my money in the S&P 500?” should have a response of, “Why has the S&P had such an above average return?”
There are of course multiple reasons; dozens of events happened during this time-period, but one of the key drivers of this change is how interest rates have changed: in this example, I’ll use the Federal Funds Effective Rate (details found at: St. Louis Fed)
From 1997-2009
S&P 500 returned +4.45%
Federal Funds rate averaged 3.93%
From 2009-2021
S&P 500 returned averaged +15.87%
Federal Funds rate averaged 0.51%
Please don’t read this and think “everything is related to interest rates” because that is certainly not the case; do know that interest rates directly impact stock market prices. You can read more about the relationship here: Investopedia – or simply look back in your email from January, I wrote a specific email on this.
Stay with me here - so we know that interest rates impact stock prices, so what is the market predicting for interest rates in 2022? According to Fortune.com, the market is pricing in as many as 7 interest rate increases in 2022!
Personally, I don’t believe this means we’re going into a recession, but I do believe we need to be actively investing in sectors that have historically performed well during periods of rising interest rates and stay diversified. By the way if you’re a client, we’ve already done that for you.
So what on earth do we do???? Let me provide one last set of data, please review this slowly.
index returns displayed by cap size and across different sets of years
Let me pause, get off my pulpit and truly answer the question of “Why shouldn’t I just put all money in the S&P 500?” Because, we have no idea what 2022 will bring. if you own enough of one index, sector, industry, stock to make a killing in it, you can also get killed by it to. We continue to believe in diversification. We continue to know that we don’t know the future, only God does. As such, we need to be global, strategic, and diversified.
1. Timing the Market: Trying to time the market is a thought of all investors, myself included. For those to have had even the slightest thought of trying to time the market, please take 8 minutes and read this post from Howard Marks (Selling Out). Here are a few of my favorite excerpts.
Amazon example of going from $6/share to $85/share, back to $6/share, then up to $600/share, and now closer to $3,300/share
Don’t just sell because the position is up
Don’t’ just sell because the position is down
If you sell, you have three ways to be wrong:
What if you sell but the position goes up?
What if you sell and you’re right in the position going down, but then when do you get back in and into what?
If you do sell, what do you do with the cash after the sell and will it be right?
“So it’s generally not a good idea to sell for purposes of market timing.”
Investing Principles: Each year, I like to re-state some of our foundational investment principles. I talk about processes a lot. Processes with financial planning, with insurance management, with investment planning. These principles are going to most directly relate to Investment Planning
Investments serve your Financial Plan: You and I are long-term, goal-focused, plan driven investors. The key to lifetime financial success to is first define your desired outcome, then continually act upon your detailed financial plan.
Market Forecasting: We believe the market cannot be consistently timed or forecasted. Therefore, we believe that the only reliable way to capture the full long-term market return is to ride out the market ups along with the historically temporary market downs.
Diversification: Because we can’t know with any certainly which sector or part of the world is going to perform best or worse, we must stay disciplined with a global, multi-sector investment allocation that provides us with historically consistent long-term outcomes.
3. 2022 Observations: The below outlines some of the compiled thoughts we’ve gathered from some of the largest money managers in the world including BlackRock, JP Morgan, Natixis, Capital Group, First Trust, etc… Do not read the below as any prediction or forecast, we simply can’t know. But this is our view of the current economy.
2020 will forever be marked as the start of Covid-19, the market dropped about a third in 33 days. Most governments’ response was to shut down the global economy and our government flooded the world with economic stimulus
2021 has been marked with vaccines, boosters, new variants, natural immunity and for the world to start living with this virus
2022 we believe will be marked by the following
Continued acceptance that Covid-19 and it’s endless variants won’t be going away
The lethality of the virus continuing to wane
The world economy will continue to re-open, supply chain disruptions will revert to normal, businesses will be better suited and more diversified than ever before
Corporate earnings will hopefully continue their forward progression
The Federal Reserve will likely reduce excess liquidity along with some higher interest rates to reduce inflation
Equity values will continue their forward progression
Please don’t take any of this as market forecasting because it certainly isn’t. I’m fully prepared to be wrong on every point provided. These past couple years have given me, and I assume you as well, volatility fatigue. Between Covid, an incredibly partisan election, inflation’s 40-year high spike, and many other data points. I’m tired of all the highs and lows, but you know what, that’s actually what we expect and continue to expect going forward. This is precisely why I talk about controlling our response to outside stimuli.
For additional market insights: First Trust and the S&P at 5,250, Capital Group 2022 Outlook, LPL Research and S&P 500 at 5,050; JP Morgan's 71 slide guide
In closing: We of course cannot control what the market does from here and we cannot predict when the next market downturn will occur. But we can control our behavior to these outside events and continue to stick with our long-term investment strategy.
As always, thank you for your trust, if you have any questions/concerns please contact me.
-Dave
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David Hobbs, CFP®, CLTC | Wealth Advisor | Founding Partner
Offices in Indianapolis & Terre Haute
Office: 317-559-2940
Schedule a MEETING
Email: D.Hobbs@CedarWealthPartners.com
www.CedarWealthPartners.com
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An index is an unmanaged portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Investors cannot invest directly in an index. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown.
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