To: Clients of McCabe & Associates, Inc.
Date: May 11, 2022
Re: Maintaining Perspective in Difficult Times
From: Tim McCabe, George McCabe, Tom Wojcik, Ryan Gandurski and William Will
Following mostly strong investment returns from 2019-2021, the first few months of 2022 have been extremely stressful and difficult for many investors. Just when many thought we could breathe a sigh of relief following the strong rebound in stock prices in the latter stages of the pandemic, we are faced with yet another set of crises, including inflation, the Russian invasion of Ukraine, and a general malaise with many Americans concerned if the government can properly address these issues. Compounding this, most investors are seeing losses in their portfolios as stock and bond prices are both falling together for the first time in many years, leaving investors with few places to seek shelter.
The losses in the fixed income portion of clients’ portfolios have been particularly alarming and painful as bonds have most often been a safe haven during difficult times for the stock market. Recent losses are sure to cause some investors to panic and abandon their bond holdings and move to cash. Although no one can say with any certainty when bond prices will stabilize, consider two things:
First, the U.S. Bond Market has had positive returns, before inflation, in all but four years since 1976. In 1994, when the Federal Reserve raised interest rates six times for a total of 2.5 percentage points, bonds lost only 3% in the aggregate.[1]
Secondly, due to the recent drop in bond prices, the yield on the aggregate U.S. Bond Market (at about 3.6%) has doubled since December 31st.[2] The recent rise in yields in short-term U.S. Treasuries will make bonds an even more effective asset class as a diversifier when stocks experience volatility in the future.
Over the last ten years, we have told many of you we would welcome the day when bonds were generating yields over 3% rather than less than 1%, but unfortunately, it doesn’t come without some short-term pain. If you are tempted to move to cash, please remember why you own bonds in your portfolio; in most years they act as a buffer against your stocks and they pay you income along the way, and now, that income will be considerably higher.
One other issue we think is important to address is the temptation to take some action, any kind of action, when markets experience volatility. As many of our long-term clients know, we make every effort to avoid chasing asset classes based only on recent returns; we think it prudent to rebalance as needed to make sure our client portfolios are properly diversified. This is one of those rare years when most every asset class is being punished with the exception of cash. We think it is important to remind clients that one of the reasons we always invest a good portion of our client portfolios in “actively managed” mutual funds is to take advantage of portfolio managers with outstanding long-term track records who use volatile times like these to invest in beaten down sectors and stocks. Taking advantage of opportunities in difficult times through active management is key to long-term success, in our opinion.
Finally, please take solace in the fact that the “grey hairs” here at McCabe have seen some difficult economic conditions from time to time over our 40+ years of advising clients. We know losses in the short term are painful, but please keep your eye on the prize. History has shown repeatedly that trying to time the markets by moving out of stocks and bonds into cash is not an effective strategy. We are confident that you will be rewarded for staying the course, as difficult as it can be at times.
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[1] Source – Jason Zweig, Wall Street Journal, May 6, 2022
[2] Source – Jason Zweig, Wall Street Journal, May 6, 2022
The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. Rebalancing may be a taxable event. Before you take any specific action be sure to consult with your tax professional. A diversified portfolio does not assure a profit or protect against loss in a declining market.