Unchanged

By Brad Thomason, CPA

​​Did you realize that stocks are basically worth exactly as much right now as they were a year ago?
 
Wait a minute, you say.  I thought that there has been a big run up this year.
 
There has been.
 
It’s just that in the final 10 weeks or so of last year, there was a big drop, too.
 
Despite the fact that we have indeed had new all-time highs on the Dow this year, most of the gains have just been a recovery of already-gained ground that was lost as we went into the final weeks of 2018.  And those new highs?  Just a few points higher than where we got to last October.  This year’s 27,400 level (which we’ve flirted with a few times) is not much of a jump from the 26,950 we had in the first week of October 2018.
 
All of the fluctuation in between may or may not have meant anything to you.  If you did not change your holdings – in other words no new money in, nor the withdrawal of any of your existing capital – the last twelve months have been flat for you.  No net change (even if there was some heartburn and/or excitement along the way).
 
If you added to your portfolio, you may have had the opportunity to do so at lower levels; and if so you have some sort of gain on those dollars, even if not the rest.
 
If you had to take money out though, you may have had to do so during the dip, in which case you traded in the shares for what were essentially discounted dollars.  The amount you ended up having available to spend (on whatever you needed the money for) was a lesser amount than you would be getting today if you were redeeming at post-recovery levels.
 
There are a couple of quick items I’ll mention merely as food for thought.  First, the scenario I described affects more investors these days than it might have a few decades ago, due to the popularity of index funds.  Even though the index levels have not had a lot of net change, the amount of rising and falling of the individual stocks that make up the totals has been much more active.  It always is.  Which on the one hand is part of the case for using the index fund in the first place.  It mutes the effect of those individual movements.
 
Those movements, however, are where the potential for profit lies, especially during times that the market as a whole is not going anywhere.  Just as with any other form of insurance (because that’s what a diversified portfolio is, whether you divide it up yourself or buy the diversification prepackaged in a fund or ETF), there’s a cost.  Creating a situation in which you might lose less than you would have, comes at the expense of possibly earning less than you could have.  Although the following statement is Monday-morning quarterbacking of the most brazen sort, it will nonetheless be true:  Many investors over the last 12 months would have seen much more growth had they been holding a self-selected basket of individual stocks, as opposed to the prepackaged basket of a large index fund. 
 
Second, if you feel like you are getting too old to be dealing with ups, downs, years of zero return without any reduction in capital risk, and conundrums over index funds versus individual stocks, well, you’re probably right.  The general presumption as people get older and move closer to retirement is that the balance of the retirement savings will get bigger.  It may not be possible to drive these balances to high enough levels without accepting some exposure to market risk during the working years.  But as people approach retirement age, especially if the investment campaign has been successful, the attention should turn from making more to protecting what you already have.  There is a point in just about every case where it becomes difficult, if not impossible, to continue to back the argument that equity holdings are suitable for the situation.  When that happens – and preferably just before it happens – folks should consider an orderly retreat from such investments.
 
The stock market has been responsible for a lot of capital growth and the funding of a lot of retirement needs.  It has been reliably up-tilted throughout all of modern American history, and is likely to continue to be.  But not in a straight line, not without weird periods of unusual return activity, and absolutely never without an element of risk of loss.
 
If you are in the part of your life when you are still growing your balances for some far-off future, spend some time contemplating the pros and cons of being all-index, or perhaps mixing in some tactically-selected individual holdings, too.
 
If you are in the part of your life when it seems prudent to exit equities, or at least seems onerously stressful to stay, then maybe it’s time to listen to that little voice and plot a course to transition your capital into holdings that behave differently.