What Do You Want Most From Your Portfolio?

Abraham Lincoln said, “Discipline is choosing between what you want now and what you want most.” Alas, investors have indicated in recent weeks that what they want now is safety. From the beginning of May through the end of the first week in June, investors withdrew $36 billion from equity funds and poured $32 billion into bond strategies.1 Admittedly, it would be irresponsible of me to render an opinion on these investors’ all-too-predictable reactions to the recent news flow and market gyrations. I would need to better understand what each of them and their families want most.

If what they truly want most is to avoid all market drawdowns at any cost, then they probably wouldn’t have been invested in equities to start. I’m willing to speculate that many of these equity-selling investors had been targeting growth in their portfolios to fund the things they really want most: to finance their children’s education, to support and enhance their children’s true skills, to fund philanthropic efforts, to build comfortable lifestyles in retirement, and more.

If that’s the case, then in recent weeks many families have likely been breaking from their long-term plans because of a few bad trade headlines. That’s unfortunate for a few reasons.

Three reasons to maintain a long-term view

First, in the first 11 trading days of June, the market, as represented by the S&P 500 Index, was up 5.11%.2 May’s price losses have almost entirely been recouped, at least for those investors who stuck around for the near-term recovery. This should come as little surprise to investors. Historically, the best days and weeks in the market (example, June 2019) have tended to group with the worst days and weeks in the market (example, May 2019), making it a fool’s errand to attempt to time the market.

Second, markets have tended to perform well after peak redemptions. Typically, by the time most investors attempt to get defensive, it is often too late. Case in point, the average one-year S&P 500 Index gain following peak equity fund redemptions after the 1987 crash, the early 1990s recession, the 1998 Asian currency crisis, the early 2000s recession, and the 2008 financial crisis is 21.7%.3