By Marc D. Langva, CFP®, Founder & CEO at WorkOptional
What if I told you the world map you have been looking at your entire life is inaccurate? You would say “Marc your crazy!” But it’s true. The global map we all grew up with is called the Mercator map, which was created to make navigation easier while sailing. The map on the left is called the Peters Projection map; this map, unlike the Mercator map, more accurately represents the size, scale, and location of the Earths continents. It turns out that Africa is fourteen times larger than Greenland!
Well, what if I told you the diversification of your portfolio may also be incorrect? You may have felt comfortable and familiar over the past few decades, however the longstanding belief that a stock/bond portfolio is all that you need to weather the impending storm may be inaccurate, just like the map.
The point of all this, is that I want you to ask yourself, “Am I prepared for the next economic downturn?” It’s getting to be like clockwork, 1999-2000 (-50%), 2008-2009 (-57%), and now 2020-2021 (-64%???). Take a look at the chart to the right; I laid out the 2008-2009 market correction chart from today moving forward to give you an image of what another correction might look like.
I’ve also overlaid the stock market crash of 1929-1930 for reference. In 1929, the market dropped and bounced back just as it did this spring and everyone breathed a sigh of relief. Little did they know that by July 1930 the market would take its second leg down and the rest is history. By 1932, the market had dropped 89% in less than three years. It didn’t recover until 1954.
Why do I share this with you and is it relevant today? History tells me that we may be in for a rough ride. The destruction in value of companies resulting from the pandemic has yet to be seen. Extreme measures taken by the Federal Reserve and fiscal programs has delayed the inevitable. The stock/bond investment mix may not save you in the economic downturn, in fact, you might not see a positive return for years to come.
If you look at historical trends, it’s really just in the past three decades that a stock/bond strategy worked so well. Why? Interest rates have been consistently falling from the high of the early 80’s which gave bonds a great return. Stocks have done incredibly well with the immense demographic tailwinds and wall-street engineering. With interest rates close to zero, and stocks at all-time highs, a typical portfolio of stocks and bonds now poses elevated risk that is greater than people realize. Looking back over the past 100 years, portfolios that included other asset classes such as commodities, tangible assets and precious metals performed much better over time, and with considerably less risk.
Look…the Fed has given you a gift of buying the market, but that gift is not eternal. I’m not suggesting that you completely abolish your entire stock/bond portfolio, but maybe your Greenland isn’t as big as you think it is.
Margaret Leto September 19th, 2020
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