We’ve all suffered through a lot together. The last few years have given investors the most jarring ride since the Great Recession. Banks are failing. Even now, the Fed seems obsessed with crashing the economy.
A lot of people are convinced that the world is on the brink of collapse. The world can end in any number of ways, destroying endless wealth and security in the process. It’s enough to make someone head for the exit.
But the question we need to grapple with as investors is a lot simpler: what if it doesn’t? What if the world stubbornly refuses to melt down and everyone on the sidelines misses their chance to participate in the good things the future still has in store?
After all, the latest economic numbers suggest that the biggest immediate fear Wall Street and Main Street currently have to grapple with is the fear of missing out. While some corporations are trimming payrolls, enough are still hiring that unemployment keeps hovering around its lowest level in over 50 years.
Wages are up. As the banks have revealed, households aren’t defaulting on their debt in large numbers. And as a result, the economy as a whole keeps growing just a little faster than inflation.
It might feel like a recession to weary workers. It might look like a recession on the horizon to wary investors. But there’s always a recession on the horizon . . . the cyclical nature of the economy ensures that we’re rarely more than a few years from the next one.
And when the fundamental numbers keep trending in the bullish direction, experienced investors know that their portfolios will ultimately be worth more as well. That’s crucial in an inflationary world like the one we live in now.
Remember how the math works? When inflation is tracking at 3% over time, your wealth needs to earn at least 3% a year or you are actually losing purchasing power. You’re getting poorer.
The Fed wants to drive inflation down to 2%, which is low but still just far enough above zero to penalize everyone so frightened that they can’t bear to do anything with their money beyond hiding it under the metaphorical bed. And right now, prevailing inflation remains high enough that even the highest-yielding bank products just don’t cut it.
That’s why the regional banks are failing, by the way. When their portfolios are stuffed with bonds paying less than inflation, they can’t raise the rates they pay on deposits . . . so the depositors bail out and the balance sheets implode. But we aren’t banks. That’s actually not our problem.
Our problem is how we effectively protect our existing wealth and build on it when the world fails to come to a screeching halt. That’s the problem of life. Living costs money.
My solution starts with a little insurance against extended periods of market stagnation like the one we’ve just lived through. When your stocks go nowhere, you need a way to stay liquid. The biggest threat is outside circumstances forcing you to sell in stressed market conditions in order to pay the bills.
That’s how hedge funds and retirement plans fail. Survivors keep enough cash flowing to surf the storms. Dividend stocks are a great way to do it. My Value Authority focuses on these opportunities to generate current income without selling a single share of stock.
Meanwhile, we’re constantly trading options through all the market’s moods. It isn’t glamorous or exciting, but it keeps money moving. That’s our defense. If the mood on Wall Street deteriorates, we buy puts. And when it recovers, we buy calls.
Of course the world could end tomorrow, in which scenario the puts would briefly make a whole lot of money before money itself becomes worthless. There’s no planning ahead for that extreme outcome.
And anything less than an extreme outcome is temporary and partial by definition. Suddenly you aren’t facing the end of the world . . . you’re just looking at a stressful environment. Generations of history prove that Wall Street and Main Street alike have survived every shock and come back more resilient than ever.
That’s the American way. On average, a year in the market is worth 8-11% above inflation. Some years are a lot worse and some are a lot better, but that’s the average that prevailed in the wake of the dot-com crash and the 2008 crash and even today.
Over the past four years, the VIX has gone crazy and the Fed has spun in a vast and terrible circle. Recession and recession shadows have alternated with bear markets and bubbles. The market has still climbed almost exactly 11% a year on average over that period . . . compounded.
Now maybe you’re eager to cut out some of the bad times in order to avoid the pain of a losing year for the market as a whole. I get that. Nobody enjoys stress. It isn’t the end of the world, but it can feel like it.
My solution there is equally simple. Nobody’s forcing you to buy and hold the market as a whole. There’s a whole world out there beyond the S&P 500.
And there are always relative strong spots in the economy as well as obvious pain points. Last year, if you were brave enough to own Big Energy, you did shockingly well. This year, it’s looking like technology is back.
You keep rotating. That’s life. It hasn’t ended yet. Maybe that’s not your world. That’s okay . . . not everyone is cut out to be an investor.