“Should I be worried about the upcoming election?”
”Is it safe to invest in US stocks and bonds given our ballooning deficit?”
”What should we do to protect ourselves when the US dollar loses its status as the world currency?”
”What if China decides to sell all of their Treasury Bonds? Won’t that mean skyrocketing interest rates and hyperinflation?”
These are the types of things I hear from prospective clients and, sometimes, even current clients. They are your concerns, and for good reason. We’re inundated with this stuff every day, depending on how much news we consume—especially financial news. You’re being so bombarded by these warnings that the odds of them happening can seem highly likely.
They are not.
This is not to say we won’t face future challenges or that things in our economy, the country, and the world, will always be good. It’s never been this way; why would it start now? Remember Covid in 2020 and the most significant spike in inflation in 50 years between 2022-2023? We’ve had three bear markets (stock market declines of -20% or more) in just the last decade. You can probably think of other challenges as well.
But my question is: Was Covid the thing you were worried about in 2018 and 2019 (or had you even heard of Covid in January 2020)? Were you so sure we’d see almost double-digit inflation a few years later? And if you were, did you first come to this conclusion in 2021? Or, if you’re being truthful, had you been expecting a spike in inflation ever since we started borrowing hundreds of billions in 2008 to address the banking and mortgage crisis, and 15+ years later, you were “right”?
If you’re being honest with yourself, you’ll admit you did not see these things coming, nor did you see them with enough prescience to act on them and profit from those actions. Most likely, none of the things you were worried about in the last ten years actually happened. And yet, we always forget our dismal forecasting track records.
I don’t focus on concerns that I could never forecast or that I have no control over. For example, to pick on one bogeyman—what if the US dollar collapses? What are the odds of that even happening? When will it happen? How would it impact financial markets—stocks, bonds, currencies, etc.? What does it even mean for the dollar to collapse? Are we worried about a decline in the percentage of international transactions that take place in dollars? Or the amount of international reserves held in dollars? And which currency will replace the dollar*?
No one knows the answers to these questions. Absolutely no one. Do you have any idea how complex a question this is? The brightest financial economists in the country can’t even predict where interest rates will be in a year, and you think we can figure out exactly when and how the dollar will collapse and what its impact will be? Come on, that’s nonsense, and you know it.
Now, I didn’t say there aren’t people who will tell you they know the answers. They have opinions, sure. Often, they’re selling something—a newsletter subscription, advertising, a financial product, whatever. That narrative and their opinions fit their agenda. But it doesn’t work for you; it’s not your agenda.
Your agenda is that you need a way to save and invest for your long-term retirement goals. Once in retirement, you’ll need an ongoing and rising income stream that affords you a comfortable lifestyle. Hopefully, there is enough left for your beneficiaries after your retirement.
And your agenda is my concern.
Unfortunately, there’s really no way to square these two concerns. You can invest in such a way that you try to protect yourself from some unpredictable future calamity. Or you can invest assuming that, like in the past, we’ll encounter significant future political, economic, and personal challenges, but we’ll eventually address them, solve or survive them, and prosper despite them.
One of the most common ways to supposedly protect yourself from all the political and economic risks I’ve been discussing is to buy gold. You know this. You’ve probably talked to people who brag about their money in gold or gold bars. They speak as if they bought Microsoft at the IPO. Ever notice they can’t even tell you the long-term return on gold?
I can.
The chart below looks at almost 50 years of returns on gold from its prior peak in 1980. You’re seeing this right—gold has underperformed inflation for nearly a half-century, including its recent spike! Gold returned +2.9% per year, but inflation was up at a rate of 3.2% annually—the “real” (net of inflation) return on gold has been -0.3% per year!
This is what happens if you give in to your fears and the financial headlines and try to protect yourself from the coming financial “tsunami” (a term all the doom-and-gloomers love to use). You wind up doing so poorly in the long run that your wealth becomes a fraction of what it once was. You trade the concern of what could happen for the reality of how will I live on a fraction of what I once had?
What if you refuse to give in to these concerns and instead focus on the very real and inevitable financial challenges you will face? Achieving a sufficient financial nest egg? An income stream you don’t outlive? Leaving some money behind when you’re gone? You dispense with the fear-mongering narratives, “safe-haven investments,” and the countless alternatives to stocks and bonds that will purportedly save you when traditional investments go belly up. You realize that owning these things and the dismal results they often deliver could be the most significant risk you face.
More specifically, you rely on the simple fundamentals of investing that have worked so well for a century:
- Choose an appropriate mix of stocks and bonds for your situation.
- Diversify your portfolio broadly but sensibly, both in terms of the number of stocks and bonds you own and the asset classes you hold.
- Don’t just put everything in a large cap US stock fund; take advantage of the diversification benefits and higher-expected returns from value and small cap stock asset classes (and diversify globally).
- Stay disciplined.
How has this “rationally optimistic approach” fared over the same period that I cited above? The chart below adds traditional investment asset classes—short-term bonds (Five-Year Treasury Notes), US large growth stocks (S&P 500 Index), and US large and small value stocks (Dimensional Value Indexes).
There's some difference, isn’t there? You can no longer even see gold on the chart, it’s buried along the bottom axis. It looks like the heartbeat of someone in a morgue.
How about the traditional investments so commonly panned by the doomers and whose best days always seem to be behind us?
Bonds had very low volatility but still produced a positive return of +6.3% per year, which was 3.1% above inflation—they more than doubled the return of gold with two-thirds less volatility. They worked especially well in bear markets. The S&P 500 had a return of nearly +12% per year, 8.6% annually more than inflation, while large and small value stocks returned almost +13% and over +14% per year, respectively (9.5% and 11.4% per year more than inflation). And while value stocks had relatively high volatility, they weren’t more volatile than gold. If you’re going to put up with the ups and downs, you might as well get paid handsomely.
I know you’re not going to completely stop worrying about the things we hear on a day-to-day basis. They’re scary if you allow yourself to think about them, and that’s why they're out there. The financial media lives to sell advertising—it’s how they make money, and no eyeballs mean no advertisers. Hence the adage, “If it bleeds, it leads.”
But thinking about these things and acting on them are two different propositions. The first is mostly a waste of time; the second could cost you dearly.
That’s why I don’t play this game with your money. I don’t manage portfolios that include all the non-traditional investments so common in the industry and amongst other advisors (some formerly belonging to my camp!)—alternatives assets, private assets, portfolio hedges, gold, commodities, etc. I stick to the fundamental core asset classes precisely because they are the core asset classes. They’ve earned the right to be considered the primary investment options over many decades and with support from the best academic research and financial science.
It’s another reason why I don’t focus on market timing and fund reshuffling but instead on client advice, coaching, and discipline. In my experience, the best approach to alleviating your fears and keeping you on the right path isn’t just making knee-jerk portfolio changes. It’s to have a conversation or conversations about the things you’re worried about and to think and work through them. I try to understand and then reframe concerns regarding what matters to you, your goals, and what you're trying to accomplish. In doing so, it often becomes clear that the most significant risk you’re facing isn’t if the thing you’re worried about happens, but instead if it doesn’t (which is always most likely) and you make an ill-advised investment change that costs you far more in losses or missed-out-on gains compared to just staying put with your original plan.
I want to help you avoid doing stupid stuff that could cost you and not make unwarranted changes to your simple and efficient investment portfolio designed to give you the best chance to achieve your goals.
When you think about it, my concerns are your concerns. They’re our concerns.
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*It might surprise people to know that the US dollar only came to be the world’s “reserve” currency in the early 1950s, supplanting the UK sterling. How have UK companies (stocks) done in the seventy years since the country’s currency lost its reserve status? Just fine and, in fact even better than US stocks in many cases.
Past performance is not a guarantee of future results. Index and mutual fund performance includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or additional expenses except where noted. Indexes and mutual funds shown are for illustrative purposes only and may not be the only or any of the funds that Servo clients hold. Servo was not managing client portfolios over the entirety of the periods shown. This content is informational and should not be considered an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.