The headlines have been terrible. Inflation is high. The automobile and home loan markets are confused. A bank run centered on the global tech center of Silicon Valley ripped through the financial sector. How did the stock market respond? The S&P 500 gained 7.5% during the quarter. The last three weeks of March (after the bank run news) each finished higher. The NASDAQ 100 was up over 20% to start the year. If you spent any time listening to the experts this quarter, the takeaway should be that nobody can predict the markets over the short-term. The loudest voices are racing to draw the most extreme conclusions. They do this not to educate you, but to pull your attention and get you to put your money in motion.
I sometimes get pushback from fund salespeople when I talk about our investment philosophy, especially around bonds. When rates were at rock-bottom levels, the argument from fund companies was that we should be taking on more risk. Go out further in duration. Take on additional credit risk. The additional return would be small, but small differences loom large in bond fund peer rankings because the range of returns in total is relatively small. We stuck to our investment process, not adding risk to bond positions where it was unnecessary. While bonds are still not a big driver of returns, the investing world has shifted acronyms from TINA (There Is No Alternative) to CINDY (Cash Is Now Delivering Yield). Stocks remain the main source of returns for portfolios, but investors can now earn some yield on their bond positions.
Silicon Valley Bank had a similar decision. They chose to maximize returns, taking on enormous duration risk in bonds with negligible credit risk. They were burned by rising interest rates. What happens next is a broad discussion over regulation and enforcement for banks, but you can’t regulate values. Greed (or Fear of Missing Out) is part of human nature. The SVB meltdown is another example of how investor behavior is the most important component of building and maintaining wealth.
Maybe the least talked about issue in the SVB debacle is career risk. Would the executives have gotten fired for not pushing the envelope the way they did? It’s a question that Wall Street product pushers ask us, too. “Aren’t you afraid your clients will fire you (if you don’t buy my product)?”
Our investment process is not about us or maximizing our assets under management, but about serving the people that trust us with their wealth, providing them with expertise and peace of mind. The best way to do that is with a prudent financial plan and a diversified portfolio.
It would be easier if the data led directly to outcomes. On paper, it’s easy to see sectors or asset classes that are cheap or expensive, but even if you knew the headlines in advance, markets remain irrational. Ask anyone who picked Purdue in this year’s March Madness about the value of winning on paper. The market is the same way. The underdogs still show up to play the game.