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It's Raining in Hawaii, and I Don't Care.

Updated: Jul 20, 2023

If you’re a 65 year old woman, you have a better chance than not of living past the age of 85, and if you’re a man, it’s not much lower. This means that you may spend decades of your life living off of your retirement nest egg. For most of us, that means equities are an important part of our investing lives.

Why? Because inflation is unavoidable; most economists would agree that you have a 100% risk of inflation over the course of your lifetime. So, I think that when we look at the long-term value of investing in equities and the length of time we’ll spend in retirement, we have to look at volatility differently than previous generations. Interest rates used to be a lot higher. People used to only spend five to ten years in retirement but now are living much longer. Things are different.

So, for those struggling with market volatility, it’s important to remember, especially when times get tough, that the force is with you. Despite suffering nine recessions in the last 60 years, the U.S. economy tallied 619 months of growth versus only 101 months of contraction-- and the S&P 500 Index returned over +30,000% over that period.[i] Cycles are inevitable, but it has generally paid to respect economic progress and stick with markets over time.

Inflation and stock market volatility are practically assured, but I’d argue that one is far more harmful than the other. For someone trying to fund 30 years of retirement, inflation is our sworn enemy.

Unfortunately, 2008 created a generation of investors who are more averse to volatility than inflation. It got so that many investors viewed every bout of volatility as the next recession, as if the next Financial Crisis were hiding behind every tree. The temptation to sidestep downturns is relatable, and the psychological and economic scars from the Tech Bubble and Global Financial Crisis remain and are very real. As you can see from the following chart, a lot of investors re-allocated away from equities over the last ten years, missed much of the greatest bull market in history, and will now likely have to expect less desirable outcomes-- retiring later, accepting a lower income during retirement, or hacking other goals out of their financial plans.

So maybe we should modify our views on volatility. Maybe we should look at volatility like living in Hawaii… Everybody knows that Hawaii is the rainiest state in the Union. It’s not even close. In case you were wondering, it rains an average of 154 days a year in Honolulu. That’s 41% of the time; it’s even more often than Seattle.[ii]

It rains a lot in the stock market, too. The S&P 500 has suffered intra-year corrections (defined as declines of 10% or more) in 16 of the last 30 years— that’s 53% of the time. That’s even more likely than a rainy day in Honolulu!

The point is that very, very few people complain about the weather in Honolulu. It’s a wonderful place to live, one of America’s finest cities and a vacation mecca. Despite the rain, everybody makes it to work or wherever it is that they need to go. I don’t know anyone who has ever cancelled a trip to Hawaii because it might rain.

It’s the same with the stock market. Investing in a diversified equity portfolio should be a lot like spending time in Hawaii. You’ll have rain from time to time (i.e. volatility), but generally speaking, being invested in stocks should be preferable for long-term investors.

Plus, if the rain really bothers you that much, you can buy umbrellas for your portfolio. We call those bonds, hedges and diversifiers, and they’re designed to weather a storm. Remember, a portfolio is not a plan in and of itself, and a portfolio that isn’t managed in service to a plan is just rank speculation-- it can have no other goal than to beat other people’s portfolios.

We may not want to go so far as to call investment portfolios a commodity just yet, but it really has become easy to build low-cost investment portfolios these days. However, no matter how easy it becomes to build a portfolio, it’s always going to be much harder and more important to build a plan because portfolios are just about performance. Plans are about behavior. And that’s important to remember when selecting an investment advisor, for there is a difference between good advice and effective advice. Good advice is everywhere, and most people generally know what they have to do to improve their health, their finances, or their lifestyle. …But knowledge alone is rarely enough to change behavior.

I remember my old friend Jim Beazly. “Beez” was over eighty years old when I started as a financial advisor in my twenties. He still went in to work every day, and he always had a good story for us young guys. Most importantly, Beez had a sign hanging on his wall that said, “Never trust a stockbroker who’s out of breath.” That sign still resonates with me now that I’m seasoned enough in the industry to have seen lots of different kinds of financial advice. Good financial advice will tell you how to succeed at something while effective advice will show you how to succeed. In other words, good advice is about tactics whereas effective advice helps you to build systems.

At the RG Bar Investment Group, we practice a goals-based approach to investing. That means we align your investment portfolios with what you want to achieve. We believe this can allow investors to stay invested while avoiding the pitfalls of badly timed, emotionally driven mistakes and thereby pursue superior outcomes.

[ii] Your Weather Service, U.S. Climate Data, Honolulu;

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