Over the past decade, I was continually asked by prospective clients at the beginning of every year what they should do with the cash they have been sitting on as they have been too afraid to get back into the market after the financial crisis. Year after year rolled by with sound returns missed by these individuals who sat on large cash positions. Their usual response was that they were "waiting for the right time to invest and for a 10% or 20% market sell-off to do so". Unfortunately for them, every time a ~ 10% market correction occurred they were still too afraid to get into the market as whatever event was currently occurring kept them from investing. Now that the stock market has sold off more than 20%, one would think investors would be clamoring to finally enter again. However, we know that isn't the case as more investors are currently selling than buying and individuals are again too afraid to purchase equities.
I often quip that I'm in the only business in which when everything is 20% off, nobody wants it. Obviously, any assets held in cash the past decade have missed extraordinary returns with the S&P 500 yielding gains over 13% per year and our flagship balanced Global Income strategy (containing U.S. stocks, international stocks and bonds) returned almost 9% annually over the last ten years (including last year's market decline).
Though I have no idea what the short term brings, I am more concerned that those who sat in cash missed an approximate 5% yield from the dividends and interest which our Global Income strategy has provided over the past decade. For those of our clients and investors who don't need cash from their portfolio (as I don't), we are able to utilize the dividends and interest to purchase more shares of stocks and bonds - which can be incredibly powerful to compounded return over time. For this reason, I worry as little if our portfolios are up or down 10% in any given year as it has a limited impact on the long term success of our clients. Moreover, declining stock and bond prices do not impact the income of our clients who fund their retirement cash flow needs because dividend and interest payments remain relatively steady whereas price fluctuations cause portfolio values to vary widely. For example, though Anheuser Busch Inbev's stock price may increase or decrease in value during any given year, the dividend payment, though not guaranteed, will generally remain steady and importantly may increase over time with the company's earnings growth to help hedge against the insidious effects taxes and inflation can have our clients' retirements.
Though our firm is compensated based upon our clients' portfolio values, our clients' income does not change dramatically as long as Pepsi (and the other 70+ stocks we own) continues to make their dividend payments and Avis Budget (among 80-90 other bonds) continues to make interest payments. However, we will likely experience defaults at times as a risk to achieve potentially higher interest payments above the very low return currently available from cash/CDs/Treasury bills. Because a stock's price doesn't have an impact on the income it generates (in fact, the yield increases when the price declines), I actually prefer to have normal and healthy stock market corrections which enables us to utilize cash flow to repurchase shares at lower prices.
As a New Year's resolution, I would resolve to remain fully invested in the coming year and attempt to not worry about the inevitable market fluctuations which come from political and/or short term economic events as trading and market timing have proven to be hazardous to one's wealth!
I'd like to wish all of our clients and friends a happy, healthy and prosperous New Year!