By: Edward Leach, CFP®
It's January 1, 2018, and you just won the lottery for $5,000,000.
You are sitting in our office, discussing your plans for the money, and you decide it's a good idea to invest the proceeds for the long term.
You decide on a portfolio of 25% US Bonds, 60% US Stocks, and 15% International Stocks.
After feeling pretty good about your lottery winnings and the investment decisions you made, you leave our office and treat yourself to a meal.
While eating that meal, a man sits at your table and tells you he traveled back in time from December 31, 2023.
In disbelief, you ask the most natural question after investing $5,000,000: "What does the future look like for the stock market?"
He informs you that he can't tell you how the stock market did—it is against time traveler rules—but he can tell you some highlights of the past five years.
2018:
The news cycle is dominated by political dysfunction and division.
Congress is grilling prominent tech company CEOs, and the threat of increased regulations for technology companies is growing.
The Federal Reserve raised interest rates, making it more costly to borrow money.
2019:
President Trump is Impeached
Proof of Russia interfering in the 2016 US Election emerges.
He pauses and tells you, this is where things get interesting…
2020:
A global pandemic, COVID-19, effectively shuts down the global economy.
Schools and businesses close, and there are mask mandates. The political division would get worse if you could believe it!
Images on the news show emergency rooms and hospitals at capacity, there is a shortage of available respirators, and people are restricted from saying final goodbyes to loved ones.
Unemployment would peak at 14.8%, surpassing the Great Financial Crisis of 2008 and 2009 by nearly 5%!
There are shortages in the supply of goods as trade is halted due to slowdowns in manufacturing.
All of this happening in an election year that would be more divisive and controversial than 2016.
2021:
The year started with the events of January 6, which saw protestors storm the US Capitol, leaving four people dead.
Several vaccines for COVID-19 received FDA approval by Pfizer, Moderna, and Johnson and Johnson. Like most things surrounding the pandemic, vaccine mandates become highly controversial.
During the summer of 2021, the US withdrew from Afghanistan, and the Taliban immediately took over the country again.
2022:
Russia would start a war with Ukraine, launching an invasion that played out live on many news networks and social media platforms.
NATO countries, specifically the US, would send military supplies and funding to support the defense of Ukraine, which brought with it more political divide.
Year-over-year inflation would surpass 9% in mid-2022, causing the Federal Reserve to increase interest rates to a level not seen since the early 2000s.
Mortgage rates are at historical highs not seen in the last 20 years.
Gas prices would soar to north of $5 per gallon during the year.
2023:
By March of 2023, the largest US Banks would lose billions of dollars in value while smaller regional banks like Silicon Valley Bank, First Republic, and Signature Bank would be seized by the FDIC.
The Federal Reserve continues to hike rates through mid-year, topping out at 5.5%, a level not seen in the last 22 years.
Mortgage rates have been the highest in over 20 years and have continued to rise since 2022.
The Speaker of the House is removed, and continued political volatility ensues.
Auto Workers launch a strike at the big three automakers.
Renewed conflict in the Middle East commences after Hamas attacks Israeli civilians and military facilities.
After hearing all this, you beg the time traveler to tell you what the stock market did over this frame because you just invested $5,000,000. He says no, you will just have to wait and see.
Before reading further, stop, put yourself in that person's shoes, and ask yourself what you would do. Continue with your meal and feel good about your decision, or call your advisor at HFA and rethink everything.
Well, assuming you had bought three ETFs that tracked the three indexes your portfolio invested in, and you rebalanced at least annually, you would have expected to track close to these benchmarks for your portfolio, which are:
25% iShares Core US Aggregate Bond ETF (Ticker: AGG)
60% iShares Russell 3000 ETF (Ticker: IWV)
15% iShares MSCI ACWI ex US ETF (Ticker: ACWX)
The result of your staying consistently invested over the six years from January 1, 2018, through December 31, 2023:
Starting Balance on January 1, 2018: $5,000,000
Ending Balance on December 31, 2023: $7,761,750
This resulted in an annualized return of 7.60% over the six years.
The story's moral is don't make short-term decisions with long-term money.
(Source of returns Kwanti Analytics, 25% iShares Core US Aggregate Bond ETF (Ticker: AGG), 60% iShares Russell 3000 ETF (Ticker: IWV), 15% iShares MSCI ACWI ex US ETF (Ticker: ACWX). Portfolio rebalanced quarterly.)
The foregoing content reflects the opinions of Highland Financial Advisors, LLC, and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct.
Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor attempting to mimic an index's performance would incur fees and expenses, which would reduce returns.
Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful or that markets will act as they have in the past.
Ed Leach, CFP®, MBA, is a Partner and Wealth Advisor at HIGHLAND Financial Advisors, LLC in Wayne, NJ, and works directly with clients advising them on their financial planning and investments. Ed’s work focuses on the unique needs of business owners, helping them extract value from their businesses while creating efficiencies in their business and personal financial plans. He is also a member of NAPFA, which is dedicated to serving fee-only advisors.