Clouds Ahead: Truth, If You Have the Time

Personal Money Planning |

By Gary Silverman, CFP®

In this 5th installment of my whacking-you-with-a-fish series, we look at more truths that can easily be overlooked or misunderstood when you are investing.

Everyone in the investing business (and if you have an IRA, 401(k), or some other investment account, that includes you) is trying to figure out what is going to perform the best going forward. If there is a category or measurement we can look at with some confidence and say, “this should do better than the rest of the market”, it gives us a leg up on making our investments grow.

Since this involves money—a lot of money—few things have been studied more. And in those studies involving the stock market we come up with many truths, some of which are:

  • Small-cap companies do better than large-cap ones…until they don’t
  • Value companies do better than growth ones…until they don’t
  • Foreign companies are a great diversifier and lowers portfolio risk…until it doesn’t

You may not be familiar with these “factors” which over time have proven to be good predictors about how a particular stock or group of stocks fare against the average return of the overall market. You can study them if you want…a simple Internet search will reveal over a thousand articles for each. And while you might find a few that poo-poo the factor effect, it will be evident that these studies have legs.

The problem is their commonality: “until they don’t.” Give me 20, 30, or 50 years and these factors work like a charm. A specific decade? Not as likely.

In recent years, since the Financial Crisis (2008 seems so long ago), large companies beat small, growth companies beat value, and foreign exposure increases portfolio risk. Ouch! That’s all 3 factors getting trounced, and these are the ones most of the investing world believes in. Imagine how “well” other purported factors worked over the years. Yes, there is a time for everything to “win,” but repeatability is the key.

Take another truth we can likely all agree on: stocks have a better long-term return than bonds. This is absolutely true. That is, unless you think 10 years is a long time. In which case, you were probably disappointed from the year 2000 until the end of 2009 during which time, stocks (as measured by the S&P 500) returned just about zero. I don’t remember what bonds did during that decade (and I’m too lazy to open another tab on my browser to check), but trust me, it was a lot more than zero.

So, when you hear someone has come up with a new way to know that a stock or sector of the market is going to outperform or an investment that will remove risk from your portfolio, be careful in applying it. Factors that are proven over time underperform at times. I recommend not going all-in on any investment strategy—unless, of course, you have a lifetime to wait.

May God protect the innocents in Ukraine.