Barring a major rally today, both the US stock market (as represented by the Russell 3000 Index) and bond market (Bloomberg U.S. Aggregate Bond Index) will log their third consecutive quarter of negative returns. If that seems unusual, you are correct. In fact, from March 1979 - March 2022, less than one out of ten quarters (14/173) have experienced negative returns from both US Stocks and US Bonds.

If you are nervous, you are not alone. But there is no need to allow our nerves to overwhelm us and lead to panic. That can be easier said than done for some. Context and history, however, can help inform our decision making and likely lead to better outcomes than acting on our emotions.

The first thing to understand about markets is that RISK is what leads to greater RETURNS. Risk is the price we pay for higher expected returns and it ain’t free. If the return is guaranteed, the reward is almost certainly quite small. For example, money market accounts such as Vanguard Cash Reserves Federal Money Market Fund Admiral Shares (VMRXX) has a 7-day average yield of 2.76% as of 9/28/22. There are few, if any, investments more likely to pay out on schedule than a US Treasury Bill, which is primarily what VMRXX is invested in.

While 2.76% may not sound bad to investors that are down 10-20% on their stock and bond portfolios this year, had you been invested in that fund for the past 5 years, your annual average return would have been @ 1.15%. On the other hand, had you invested in the SPDR S&P 500 ETF Trust (SPY) over that same timeframe, you would have earned @ 10.04% annually, as illustrated in Exhibit 1. That equates to a difference of $5,546.02 on a $10,000 investment over that time frame.

Exhibit 1. SPY vs VMRXX Over Last 5 years

Past performance is no guarantee of future results (Source: Kwanti).

History shows us that markets have rewarded long-term investors. Think all the way back to two years ago. In March of 2020, the S&P 500 Index declined 33.79% from the previous high as the pandemic worsened.¹ Even if investors were able to time getting out of the market, they were probably unable to correctly time getting back in. As more information became available, the S&P 500 Index jumped 17.57% from its March 23 low in just three trading sessions. Investors who fled to cash to try to time the market may have lost significantly.

Today, as always, there are frightening headlines that are adding to our anxiety. The Federal Reserve raising interest rates, inverted yield curve, cryptocurrencies collapsing, war in Europe, and 40 year highs in inflation are all sure to provide inspiration for media outlets to catch our attention, especially if we are looking for confirmation of the doom and gloom.

While the future is uncertain, the quality of your choices doesn’t have to be. When headlines scream do something, remember the lessons we have learned from previous stressful periods. Below are three articles I have written during some of those times:

If you haven’t reviewed your financial plan lately, it may be a good time for us to chat. We can integrate your unique needs into a plan that you can stick with in good times and bad. We can help determine if it makes sense to make adjustments such as rebalancing or tax loss harvesting. There are things that matter and things we can control; focusing on the overlap between the two can lead to a better investment experience. Get in touch if you would like to discuss.

What Now?

Exhibit 1. SPY vs VMRXX Over Last 5 years

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