Midyear Perspective
As America continued to recover from the COVID-19 pandemic in the first half of 2021, the economy and capital markets marched forward as businesses reopened and life began to return to normal. At the start of 2021, vaccines were just starting to be distributed. Only six months later everyone in America who wants to be vaccinated has been, or can be, at their discretion. Entering July, over half of the U.S. has been vaccinated with at least one shot. This, combined with estimates of individuals who have already had the virus, suggests that over 70% of the U.S. population has at least some immunity to COVID-19, likely approaching the experts’ definition of heard immunity (70-90%). COVID-19 and its variants continue to be a wild card, but one that the capital markets have largely learned to ignore.
The last year and a half has been a challenging time to be a long-term, goal oriented investor. We not only had to navigate the pandemic of a century, which temporarily decimated businesses, the economy, and investor portfolios, but we have had possibly more “distractions” presented to us than ever in history. On top of the never ending predictions about how, why, and when the stock market will collapse into ruin, many investors have struggled mightily to deal with a new challenge…FOMO, or the fear of missing out. Stories of cryptocurrency and Tesla millionaires have been plastered across social media. The “meme stock” saga which saw retail investors bring hedge funds to their knees by buying up shares of near bankrupt stocks such as GameStop and AMC has been a revolving headline on CNBC for over a year. Investors piled dollars into small and large technology companies despite elevated valuations and experienced upwards of 100% returns in some cases. With so many get rich-quick-stories, it is hard, if not impossible, to tune out this constant background noise.
Diversified investors have had to endure this craze for some time and may be questioning why they aren’t participating in the “easy money”. Is my portfolio return enough when my neighbor is bragging about doubling his money in 7 months? I have often found the real truth to these stories is never quite what it seems. Much like a gambler who only tells you about his winners and never his losers, the odds of consistently making a profit trading in and out of high risk, high reward investments is extremely low, and there is certainly no basis for creating a financial plan on this strategy. Someone risking money at the age of 20 on a moonshot investment, whether it triples in the next year or goes to zero, is quite irrelevant to their long term future. On the other hand, someone near or currently in retirement does not have the time or capacity to realize a permanent, significant loss to their nest egg betting a significant amount on a grand slam.
Unlike rolling the dice on a large speculative bet, the broad stock market has a long history of return data in which a real financial and retirement income plan can be developed, using reasonable historical assumptions. Maybe more impressive than the S&P 500’s price level increasing from 58 to over 4,200 in the last 61 years is that the income the index provides has also gone up around 30 times, averaging around 6% dividend growth. Combined, this price appreciation and income growth has far outpaced most other investment avenues when it comes to helping to maintain a family’s lifestyle, combat the dollar erosion of inflation and taxes and leave a meaningful legacy to heirs or charitable institutions. My advice for gambling will always be to do it with only what you can afford to lose.