Sometimes it can be difficult to remain a disciplined investor. Over periods of time, a diversified buy-hold-rebalance strategy can seem like it is not performing as well as it should, especially when we see some other “hot investment” making headlines. It can lead us to wonder if we may be missing out on some new and lucrative investment trend. An example: In the months following the pandemic, “Stay at Home” stocks like Netflix and Peloton were going to the moon, and anything related to healthcare was unbeatable. In addition, “meme stocks” were doing incredibly well, cryptocurrencies and “non-fungible tokens” (aka NFTs) were minting millionaires and various tech stocks grew to astronomical highs. At the same time, Willow Creek portfolios chugged along with “modest” double-digit growth.
Our Long-Term Focus
The goal of a long-term, diversified, buy-hold-rebalance strategy is simple: Invest in broad markets, rebalance at opportune times, and do not place concentrated bets or attempt to time when to get in and out of investments. History shows that over time, this method beats other active strategies and rewards with returns that are commensurate to the risk taken. It requires patience and the fortitude to not be lured into investment manias or the temptation to sell when times are choppy. When we refer to a diversified portfolio, we mean a mix of stocks and bonds. The stock portion holds allocations in US large and small companies, international large and small companies, emerging markets, and real estate companies. On the bond side, we typically mix in high-quality short and intermediate-term bonds. These can be US treasury and agency bonds, investment-grade corporate bonds, and sometimes, municipal bonds. Bonds are typically more defensive in nature and add a measure of relative stability, providing steady income to a portfolio. That said, bonds can go down in value; the first nine months of 2022, for example, saw some of the steepest declines ever for bonds. Why go into all this background? Because it helps explain what we did – or did not do – over these past three years.
Pandemic Mania
During most of the first two years of the pandemic, US tech stocks (or so-called growth stocks) saw exceptional and unexpected growth. The FANMAG stocks (comprised of just six mega-companies Facebook (now Meta), Apple, Netflix, Microsoft, Amazon, and Google) were up an average of 105% from 1/1/20 to 1/1/22, while our “boring” 60/40 portfolio was only up 26%. Then there were the darlings of the pandemic like Tesla, Zoom, and Peloton; and the “meme stocks” – ones where investors would crowd into a trade based on a viral Tweet or other social media posting. Over much of this period, they exploded in value with some increasing over 1,000%. It was an extraordinary period of exceptional market growth.
Where are They Now?
FANMAG stocks are down an average of 50% from the start of 2022 and Tesla, Peloton, and Zoom are now trading, on average, 85% below their highs. Bitcoin is down 75%. Other cryptocurrencies and NFTs have evaporated and lost 100% of their value. Meanwhile, the humble 60/40 is only down 11% for the year, and during the most recent quarter, posted a positive return of 8% (versus a decline for FANMAG of -4%).
Why it is Hard to Resist the Temptation
Many of these assets and companies were new and interesting, offering the promise of new markets and growth. And to compound this, trading platforms based on mobile apps, such as Robinhood, made it easy to trade. Anyone could do it – it was the democratization of investments. When the financial press is filled with stories of money being made so quickly, why should you stick to the more conventional approach? No matter how we looked at each of these issues, they never made sense from an investment point of view. The FANMAG stocks traded at ridiculous prices relative to their fundamental values – at one point the six companies made up almost 30% of the entire value of the S&P 500. Tesla’s total value was greater than all other automakers put together and Bitcoin climbed ever higher on the theory that it was going to go higher still – despite having no intrinsic value beyond its built-in scarcity. The “meme stocks” like movie theater chain AMC, GameStop, or Bed Bath and Beyond (all three currently near bankruptcy) were, on certain days, the most heavily traded stocks - valued in the billions.
Growth vs. Value
Ultimately, it is the age-old story of growth versus value. Growth stocks are viewed as having enormous potential so investors pile into them thinking that they will grow forever at their current rates. But eventually, reality catches up to the story, and valuations and expectations are reset. The growth company then becomes a value company, which happened to Facebook (Meta) last year along with many others. In general, value stocks have outperformed growth stocks significantly over the last two years – by almost 26%. And over the long run, value maintains a history of outperforming growth and adds meaningful returns to those who stick to the value-based approach.
Still afraid of missing out? Keep in mind that any well-diversified portfolio still holds some of those trendy growth stocks. Investing well is not easy. It takes discipline, patience, and the ability to not get caught up in the moment when markets are going up, or down. It can sometimes mean feeling like we are losing ground to whatever trend is gripping the market at the time. Our advice: avoid the fads and remain focused on your long-range investing goals.