Intro & Is This Time Different? – Why this question comes up every 1–2 years
Marcus Schafer
This is episode 31 of Return on Reason where logic meets life and investing. Pat, welcome back. We missed you two weeks ago. The topic of conversation today is going to be, this time different related to recent energy shocks as a result of conflict in the Middle East? You know, we started this little podcast, call it a year ago, and we covered a very similar topic, different.
purpose, but same kind of concept. Is this time different because markets had sustained a 10 or 20 % drop due to tariffs? We recently had about a 10 % drop depending on the basket of securities you’re using to represent stock markets. So Pat, the question is, is this time different? How common are instances like this?
How Common Are Market Drops?- 5% and 10% declines as a normal part of investing
Pat Collins
First off, to be back. Sorry to leave you hanging last episode, but I thought you did a great job with it. ⁓ Yeah, this is ⁓ this theme of us coming on, talking about markets ⁓ and maybe concerns about the market when there are ⁓ drops in the market. It’s probably not gonna be the last time we do this. ⁓ It is very common for the stock market to drop, similar to what we’ve seen.
When you look at the stats going back about a hundred years, the stock market on average drops 5 % about three to four times a year. So that’s step one right there is, you know, expect that, you know, it’s just kind of a feature, not a bug of investing. ⁓ We now kind of hit this, as you insinuated this 10 % drop, just people consider that a market correction that happens on average about once every one and a half years. So again,
Very common, you should expect to see this in the majority of years or maybe just slightly about every other year to see this type of drop. Again, we saw it last year. It doesn’t happen exactly every one and a half years, I’m sure, as everybody realized. You could have three of these in one year and then you might have a year or two where you don’t have any. So it doesn’t necessarily come in uniformity. But the one thing I want to talk about, because this is a common theme I feel like I hear from clients from time to time is,
once the market starts dropping, maybe it’s time for us to kind of take some risk off the table, wait for things to get better, because it seems like it’s going to continue. When you’re in the midst of it, it seems like things are going to get worse, because that’s what you’ve really seen. It’s this recency bias of seeing how things are dropping. It’s like, gosh, I guess it’s going to continue to drop. And I think the stats are really telling. It’s that what I mentioned, the market goes down 10 % about once every one and a half years.
Headlines vs Portfolio Reality – Why diversified portfolios may not reflect the narrative
the market goes down 20%, which would be kind of bear market territory, about once every six years on average. So what you can glean from that is when the market drops 10%, there is about one out of every four times, it’s going to continue to keep dropping and go down to 20%. But that also means three out of every four times, at least historically, it’s come back, it never hit 20 % losses, and it came back
and recovered. So if you are playing the odds, which we know that’s what we kind of encourage our clients to do, is there are no certainties, but we want to use probabilities to make decisions. The probability is, is that this does not continue to go down. Doesn’t mean that it can’t. Obviously 25 % of the time it does, but we shouldn’t be making investment decisions to get out just because the market has dropped thus far. It doesn’t mean it’s going to continue to drop.
Marcus Schafer
I think that’s such a great point. And each of those break points, know, 5%, only about 20, 25 % of the time is going to drop to 10%. Only about 20 or 25 % of the time is going to drop again. So the odds of that not happening are in your favor. I love that. You know, there’s also this, there’s this disconnect between the headlines and what maybe we’re actually seeing in market performance year to date, right? Because the headlines are all about what’s going on.
some of that market related, some of that politics related, some of that conflict related. I think it leads to be very negative to the point where, you know, we want to have conversation. Markets obviously do not like what is happening. But at the same time, total stock market performance year to date for the first quarter, it’s somewhere between zero or 2%, zero flat or 2%.
losses. It’s not a 10 % loss. So what does that mean? It means we had a really good start to the year where stock market performance was, you know, before the events really took off. Large cap growth stocks, they were actually about flat, slightly negative. US as a whole was about flat, small value, ⁓ international emerging markets. Those were all up between 10 and 15 % before this started. So despite kind of the ⁓
the doom that you might be feeling, it’s not showing that into your investment portfolio.
Pat Collins
Totally agree. did just a quick look at and I think there’s one. Yes, I think what we’ve seen is a little bit of a roller coaster in the first quarter. So we had positive gains leading up to kind of the conflict, if you will. And then obviously the market has sold off. It’s been a little bit of ⁓ a roller coaster. I’ll kind of get back to where we started in some ways, like as you’re mentioning, we’re close to flat for the year, maybe slightly down, depending on the types of markets you’re looking at.
I did a quick look at, you know, kind of a diversified portfolio, which I think we’ve been encouraging our clients as well as our listeners to be really focused on diversifying your assets. It’s kind of one of the free lunches you can get in investing. And diversified portfolios actually have done pretty well ⁓ so far this year, or at least not as bad. I looked at some of the asset classes that are either flat or positive for the year that we invest in.
Diversification in Action – How different asset classes behaved during recent volatility
And I found that there’s quite a few of them, small cap value positive, REITs, real estate positive, reinsurance positive, bonds are basically flat, emerging markets flat, private credit flat, energy stocks up significant. ⁓ So there’s lots of areas of the market that have done well. There’s a bunch of areas that have not done well. If you’ve been very concentrated, you could have had a pretty extreme ⁓ result so far in this first quarter. But if you’ve been diversified, you’ve definitely
weathered the storm pretty well, most likely, and you’ve probably, you know, smoothed out the ride to a large degree. So for a lot of people, that’s a lot more enjoyable than kind of the major ups and downs you get by putting all of your money in tech stocks. Or conversely, maybe it worked out for you if had all your money in energy stocks, because those stocks have done very well. So I think the bigger point is, is that diversification still works. We believe in it. It’s actually worked very well so far this year.
Marcus Schafer
Yeah, I think that kind of leads us, I mean, into what are the takeaways, right? Number one, diversification is still valuable and diversification means one of two things. You’re always having to say sorry or you’re never having to say sorry, right? Because you’re always having to say sorry. Something’s always doing worse than something else. You’re never having to say sorry. You’re kind of expecting the average of all those and that means you’re kind of getting what you expect. The other big takeaway I have is…
It is really tough to do multi-level forecasting, meaning could we have forecasted the start of an actual kind of bombings and kinetic activity? Could we have forecasted that? Could we have forecasted the implications on global trade and then the downstream implications of that on asset classes? And the answer is no. And we know that because markets were up before it.
If they knew about it in advance, we would have expected that to be incorporated into the price. ⁓ Although the research doesn’t really tell us when we can figure out the bottom, there is very strong compelling research that does tell you one thing you can forecast is current volatility leads to future volatility, which means if you see a lot of volatility in the marketplace, you can expect tomorrow.
The Limits of Forecasting – But current volatility predicts future volatility
to be pretty volatile as well. That doesn’t tell you directionality, it just tells you that the market is trying to figure out exactly what’s going on and the implications and companies and governments are responding to try to figure out a way to make money and come out ahead of this stronger than they were going in.
Pat Collins
I think this is a, it’s a good time to look backwards just even one year and to kind of really think through how hard it is to time the markets and figure out what to do with your portfolios from a trading perspective in these types of environments. So if we rewind, it was almost a year ago today, probably we spoke about tariffs and that was the big headline. We had a correction in the markets, but think through kind of, if you kind of think back that far, what was happening and how markets reacted. Well,
First off, we kind of knew that these tariffs were a possibility. It was part of the campaign. It was part of some of the things that we’re talking about. I don’t know if anybody knew exactly what that was going to look like, but as it started, the market sold off basically. And, you know, if you would have said to somebody, first off, we’re going to have this, you know, these tariffs hit the economy. Most people, a lot of people predicting recession, some bad things. The market did sell off. But if you look at what happened last year,
We ended up with ⁓ double digit returns in the teens in the US and in the international markets, we had 20 plus 25 % returns. ⁓ And so if I had said to somebody in the beginning of the year, we are going to slap tariffs on goods coming in from all of these different countries.
and it’s gonna really impact potentially the price that those goods are sold at inside the US and make them less competitive. Most people would have said, I don’t know if we wanna invest in international at this point, because aren’t they going to have a hard time selling into the US with these tariffs now? Fast forward a year later, they basically doubled the returns of the US market. So I do think it’s one thing, if you said,
I feel like I really understand what’s going to happen overseas in Iran. I think this is going to be worse than expected. I think this is going to continue or even I think this is going to end very quickly. Just knowing, even knowing what’s going to happen, you could have known about the tariffs. It is really hard to predict how the market’s going to react to that. So I just caution people if you think you know what’s going to happen, which, you know, just.
and let everybody in on secret, nobody does. Nobody really knows what’s going to happen. But even if you did, it still would be hard to predict how the market is going to react to that. another reason why it’s really, really dangerous to try to trade this stuff, because it ends up being much more, if you get it right, it’s more lucky than skill.
Lessons from Tariffs (1) – A past version of “Is It Different This Time?”
Marcus Schafer
Yeah, and it’s luck and skill and also trying to figure out what’s the timeline for your investment, right? And one of the big takeaways for me is it’s like a flashback to high school civics for everybody, right? Like, you know, one of the benefits of the U.S. governmental structure is checks and balances. And what did we just see? A lot of the tariff stuff stopped by the judicial branch. Things are we built a system that’s resilient.
over time that works this stuff out. And it’s really tough to figure out, are you going to wait for a judge to make a decision to figure out your trade? The markets move way, way quicker than that. ⁓ You know, one thing I often think about, and you and I talk about this just in the business that we operate is we have to wear a lot of different hats during a lot of different moments. And so a moment like this, I’m thinking, what different hats am I wearing? Well, at one hand, I’m wearing my
my patriot hat, wearing my, I want my country to be the best country and represent itself where, well, where, where do I vote in that? I vote in the polls for that. Another hat I’m wearing, a consumer hat, right? So what are the implications of what’s happening on me as a consumer? Well, gas prices are certainly increasing. Well, I can make a vote. I can make a choice with how I’m spending my money in response to the latest shocks.
And then we come to investments and it’s, Hey, I’m also an investor and what action should I take as an investor? And assuming you’re diversified and assuming you’re in a portfolio that you’re comfortable with, the evidence just kind of screens at you. The action you should take is none. You should just write it out. ⁓ So just thinking about those different hats and then trying to make sure in each decision, you’re just wearing the right hat for each decision. I think it’s, it’s helpful for me.
Pat Collins
Yeah, I think it’s so easy to let the kind of which hat you’re wearing dictate other parts of your decision-making process, which is a dangerous thing. We’ve always said you should never let politics dictate your investment strategy. And if you find that yourself, you know, making decisions on your investments because of your political views, it’s usually a recipe for disaster, typically.
The Three Investor Roles – Citizen, consumer, investor—and how each shapes decisions
Marcus Schafer
My dad used to always tell me, doesn’t matter what you say, it matters what people hear. And the truth about markets, they’re not listening to us. They don’t care about our emotions, what we want to happen, about fear or greed from any individual level. They’re accumulating that at the broad spectrum. And I think that’s humbling, but it should also be freeing. That it’s kind of a battle with our own emotions as opposed to trying to
trying to put those into the market.
Pat Collins
One thing just as you brought up the kind of the last point of as an investor’s, you know, our investor hat. I think one thing, whenever you go through periods like this, I think it’s good to go back to some basic concepts of, and probably the biggest one for me is, can I trust that the price of the stock market or of an individual stock is fair today? You know, you can make the argument that I think things are gonna get a lot worse and stocks are just gonna go down. These prices today are not right, they’re gonna get worse.
And that’s, think, a lot of times what people’s, you in their mind, that’s kind of the way they’re thinking about things. And I think it’s worth stopping and really trying to understand how prices are set and is it a fair price given all the stuff that’s happening in the world. And so I think that’s one part to stop and say, you know, if I look at the price of Coca-Cola today, how is that being set? Well, we have basically today when the market opens at nine thirty, we’re going to have millions of people
that are buying and selling Coca-Cola, all because they have different viewpoints on how Coca-Cola is going to do in the future. So we’re gonna have buyers that think Coca-Cola is a good buy at this price. We’re gonna have sellers that think Coca-Cola is too high or they need to take their money out of it for whatever reason. There’s better investment options, but you end up getting this equilibrium for prices and it’s being set by buyers and sellers all over the world. They all have basically the same information.
And so I think that is a good sign for all of us that are in the markets is that everything that we know about Coca-Cola today is getting set into that price basically. And you have to know something that the market doesn’t for you to be able to have kind of an edge on that basically. And what we know is that, unless you’re doing something illegal with insider trading, you most likely do not have.
information that nobody else knows. So I think there’s a good idea, you know, there’s a good precedent that you can trust the price because you have all these people that are setting it. The second part I would say to that is just kind of a little thought experiment you can go through in your head of let’s just use the kind of conflicts that we’re going through. Let’s say President Trump came out today and said the war’s over, conflict’s over, we are removing our troops.
Iran is now basically has agreed we’re going back to normal. ⁓ The straight of her moves is open. Everything is going to get back to how it was or maybe even better. What would happen in that scenario? I think most people would agree that you would probably see prices go up because that uncertainty has been removed now from the equation and people would be more optimistic about the future. Well, that means
How Markets Price Information – Why prices already reflect known risks
that prices are depressed today, if you believe that, prices are depressed today because of all the events that are happening in the Middle East. So prices have already reflected all some of the bad stuff that’s happening. So I think it’s just a good way to think about things to say, well, if prices are down because of what’s happening over there, that means they’re reflective of all the stuff that’s known over in the Middle East. And so if those things improve, then prices should go up. If they get
worse than expected. So it’s already pricing in bad things to happen. That’s why the market dropped, you know, that was in a correction territory. What we have to know to be to have an edge, which I’m not suggesting anybody really does, we have to know something that everybody doesn’t. And that’s really hard to do.
Marcus Schafer
Yeah, it’s a, you know, going back to this point earlier, some baskets of securities have fallen more than 10%, but broadly overall seems like the health of the market is, is fine. These are still good questions to be asking because it’s probably better to ask somebody other than newspapers trying to sell you advertisements when you go to their website ⁓ or get you to get you to return. So I just, I’ve
kind of got a list of questions from things that I’ve heard that I just thought we could just walk through. think they’re good questions to discuss and hopefully everybody comes out feeling a little bit stronger. You might have one of these questions yourself. The first question is, it kind of gets back to this, hey, is this time different? Well, what is this time? This time is like an energy shock. So what are the historical parallels to this energy shock and is it different? Pat, that’s a…
question I’ll let you start with.
Pat Collins
So it’s always different. That’s the old adage that those are the most dangerous words in the investment kind of universe is, is this time different or this time is different because it usually leads people to selling out of their investments. And it’s usually always, you know, it’s always historically been a bad idea to do that. But have we had energy shocks in the past? Absolutely. What can we learn from them? Probably not a lot because there are so many different factors that are going on in the world at the time of, say, in the 1970s when we had an energy crisis.
Energy Shocks in History (2) – What oil shocks have meant for future market returns
there was ⁓ really, really high inflation way more than we have today. It was just a different economy. There was a lot of different factors, but we had our director of investments, Justin Brown, do some ⁓ research on this. And what we were interested in looking at is what about the times, not just in the seventies, but what about the times where there’s been like massive oil shocks? What happens, you know, kind of following that? What can we expect? And
Basically, he went back to 1980. He found enough data to kind of look at this and basically categorized the market into three different segments. Times when oil falls more than 30 percent, times when oil rises more than 30 percent, and then basically everything in between. And as you might expect, almost 93 percent of the time, oil is not going up or down more than 30 percent. It’s a very rare circumstance where you have these shocks like we’re experiencing today.
And so I think the big one is when oil is falling more than 30%, the next 12 months in the market, it’s only happened about 3 % of the time, by the way, but the next 12 months have been very good in the market. 26 % returns basically on average. When oil is basically just in a band where it is 93 % of the time, the average return on the market since 1980 is just under 13%. So.
Very good, but kind of like you’re closer to your long-term average of the market. Now, here’s what’s interesting is when there’s an oil shock, like what we’ve experienced now, oil goes up more than 30%. You would expect that to have really, really negative impacts on the market. It’s only happened about 5 % of the time. And of those times, the next 12 months in the market, the stock market has been up an average of 11.6%.
So what it looks like to us is the price of oil doesn’t have a gigantic impact on future returns. And that could be because the market’s pretty efficient and it can see things happening and the future is already priced in and whatnot. But I guess my point here is if you were thinking about making a change in your portfolio because the gas prices at the pump are really high.
⁓ or you see this conflict expanding and prices in oil could go up. I would just caution you to do that because on average, at least historically, it doesn’t happen a lot. So I wouldn’t glean a ton from this, but at least the history tells us it hasn’t had a massive negative impact on future stock market returns.
Are You Taking the Right Risk? – Balancing risk tolerance with long-term goals
Marcus Schafer
Yeah, especially compared to the investment time horizons that you’re really looking at, right? Which is not a six month investment time horizon. It’s not a one year. It’s not even a three year for almost everybody. It is these really long-term horizons. And one of the challenges, narratively, it’s easy to go back to these moments in time and try to think about connections. You often see this where
Two people will overlay charts from very different time periods and say, look at how they’re connected. And the way I just think about it is you have all this data, but you’re really trying to base your whole decision off of something that happens one time in the past. So can we learn things from investment principles beyond the big decision? I’m not sure we can, but what I hope is policymakers and businesses, they’re also learning.
from these situations that have happened in the past, right? Like Russia invades Ukraine, energy markets obviously very affected, a lot of changing of routes and shipping routes and hey, everybody’s a little bit better at that particular aspect. They were already very good at it. This is their daily job. Now everybody’s a little bit better. So as an investor, does give me confidence to also remember that I’m not the only one learning through this.
companies are learning through this. They’re trying to figure out ways to maintain profitability. And to your point, if you look at all these different conflicts that have arisen, oftentimes, yeah, there is a short-term market reaction of pain and difficulty, and then people figure it out. They figure out how are we going to improvise. And that’s, I think, one of the merits of capitalism. Let me run by another question that I think is really good, which is it gets back to your
point about risk, right? Like, am I taking the appropriate amount of risk? How do you think people should think about that question?
Pat Collins
think
that one ⁓ is hard to do. It’s like trying to figure out how to fly a plane while you’re in the air kind of thing. I think that’s a decision that you want to make ⁓ early on, hopefully, or regularly having this discussion and not in the midst of kind of crisis or market downturns or whatnot. it’s a really tough thing. There’s obviously, am I taking enough risk or the right amount of risk? I think there’s so many things that go into that. One is your own kind of behavioral
kind of understanding of your own kind of self-assessment of how much risk I’m willing to take. I think that one, I’ve yet to find people that really have a good self-awareness to figure that out ⁓ at any one given time. Probably some things that you could use to say, am I on the right path is, how have I reacted in the past? We talked about, there’s been 10 % corrections almost every year, every other year or so. And what have I done through those periods? You might say, ⁓
Well, I tend to tweak the portfolio a little bit. Maybe you were taking too much risk because you just got really nervous and that was just too much risk in the portfolio. Maybe you say, I didn’t do anything. I just wrote it out. ⁓ And that maybe that means you’re kind of at the right level of risk. Very few people I would say will kind of go into these environments and say, my gosh, what a buying opportunity like today, right now. Wow, the market’s down. I can buy more at lower prices.
That’s a more rare trait that I tend to see. That might mean you’re not taking enough risks potentially. So these are all things that you wanna take a look at about your own self. So a lot of it’s personal. How do I feel about seeing my portfolio go up and down? And the more volatility I’m okay with because I know I’m gonna get higher potential returns, you have to weigh that. So figuring out your ⁓ appetite for volatility, look at your past behavior.
Is This an Opportunity? – How to think about lower prices and future expectations
The other part is whether you do it on your own or with an advisor, you should be also looking at what kind of risk do I need to take to achieve my goals? And that’s a really important one too. And hopefully there’s not a big disconnect there. If I say I’m willing to take risk at a very low level, because I just don’t like the volatility, I don’t feel comfortable with it. And that equates to a portfolio that’s gonna earn 4 % a year. And your financial plan says you need to earn 6 % a year to be able to accomplish your goals.
That’s where you have some disconnect and you got to figure out, what am I going to do? I most likely either need to increase the amount of risk I’m comfortable with or I have to change my goals. ⁓ One of those two things. So I think there’s kind of two factors here. It’s my internal tolerance for risk. Am I okay with the volatility I’m seeing and can I ride it out? And the other side of it is, is the risk I’m taking suitable to be able to accomplish my long-term objectives? Hopefully those are aligned.
If they’re not, then you have to start thinking about trade-offs basically.
Marcus Schafer
The only thing I would add to that, because I think you put it excellently, is making a distinction between what in the business we call compensated and uncompensated risk, which is, hey, if I’m talking about I have a globally diversified portfolio of stocks and a globally diversified portfolio of bonds, and I’m looking at that volatility, yeah, I think you want to understand, hey, am I feeling the heat? ⁓ Am I staying?
staying comfortable, you’re learning more about your risk tolerance and your risk capacity. And you should absolutely be trying to think about, right, well, maybe I learned something new about my risk tolerance. Maybe I’m getting into a different stage of life. I’m getting closer to retirement, which you always say is the riskiest day of your portfolio’s life. Hey, maybe I do want to revisit this. Let’s try to take the emotion out of it. Let’s set a calendar appointment, go talk to somebody in a month or two.
and just let them know how I was feeling at that moment. And then there’s the second point, which is uncompensated risk. And this is, hey, if you have a lot of your net worth tied up in a very few small individual positions where you have a lot of individual stocks, and if we’re talking about dispersion of baskets of stocks, you’re gonna see wider dispersion of returns for individual stocks. From that standpoint, I think now might be as good a time as there ever is to think about getting into a more.
diversified basket or trying to think about getting out of an active fund into an index fund that does something very similar with more diversification at a cheaper cost that’s more tax efficient. So I do think there’s kind of this, hey, should you make these big changes? No, but this might be an opportunity to make incremental changes that actually puts you in a better position. as you and I
will attest it is very tough to tell the difference between those two things sometimes in the moment.
Pat Collins
Yes. And just going back to the idea of your risk tolerance, ⁓ and let’s just say there is a disconnect with, you’re just not comfortable taking risk and that risk that you are comfortable taking is not enough to earn your returns. Is there anything you can do to get more comfortable taking risk? It’s a question I think about a lot because I guess my initial take has always been that this is stuff that we’re hardwired with probably at a very young age about how we
and maybe even basically genetics through hundreds and hundreds and thousands of years ⁓ on how we survived basically as a species is that when we saw danger, we ran, it was kind of the fight or flight. And when we see danger, our brains are wired to get out. And so I do think that is a challenge. ⁓ One thing I would just say is I do think there are things you can do to incrementally help that. And some of that is just building
a philosophy and a discipline that you really believe in and you have confidence in. And that can get you through a lot of periods versus just looking at prices and saying, my gosh, I’ve lost 10 % without having a philosophy or discipline behind it. And I think there’s kind of this, this progression that happens as an investor. And I would just encourage people, think those that are listening to this podcast, hopefully this is helping you. But I think it starts with knowledge that you have to build some knowledge.
in how markets work and how prices are set. And do you trust that prices are correct? Those are things that, you know, with knowledge can kind of come a little bit more confidence in the markets themselves. Confidence that over time prices tend to go up for lots of different reasons. ⁓ Over time that diversification works. So all of these things that you can kind of build upon, it starts to build confidence. And then finally, I believe that creates discipline.
So it’s kind of this three step approach of first build your knowledge that will create confidence in what you’re doing. And then when you’re confident, you will have discipline to get through periods like this. just hopefully it’s an encouragement for people that are listening that you kind of take those steps and there’s lots of different ways you can build your knowledge. We’re not the only podcast. There’s lots of places you can go to learn. Hopefully you’re getting it from good trusted sources and that I think will help you along the way.
Marcus Schafer
I thought you were going to say go skydiving, but yeah, education, knowledge, confidence definitely seems like more reasonable perspective. ⁓ One of the things you mentioned was, is this an opportunity? I’ve kind of heard that a few times. And what you had said was, if it is an opportunity, maybe you weren’t, and that’s right in the first place. Maybe just expand on, is this an opportunity? Because markets started the year great, then they fell a little bit.
So it doesn’t seem unreasonable to think that if this all gets solved, we would go back to a very similar place than before it happened.
Pat Collins
Yeah, and nobody knows the future. So I don’t know what’s going to happen in the next three months, six months. I do have some data that came from our investment committee as well that I’ll go over in a minute. what I would say there is the only thing I know with any probably high degree of certainty is it’s a better time today to invest than it was a month ago. When prices were 10 % higher than they are today, it’s better today because you can buy at lower prices. What the next three months or next six months are going to do is anybody’s guess.
but it is better than where it was. So if you were thinking about investing a month ago and you were lucky enough not to make that investment and you still are sitting on cash, I would say, you you should be considering doing that, you know, investing. Maybe it’s not all at once. Maybe you’re putting a little bit in if you’re nervous. ⁓ But I do want to go back to that concept. And again, we like to think about perspective and all of these things of what’s the history told us about these items.
Markets During Conflict (3) – What history shows about returns following geopolitical events
it doesn’t tell us what’s going to happen in the future, but it gives us some, I guess, view into the past and historical reference to say, okay, this is similar. What’s happened before. And our, our investment team basically put together some data on all major crises, crises that U S has been in since 1950. There’s been 15 of them, surprisingly. So obviously there’s been like major wars like, like Vietnam, but then we have
smaller things like what we’re doing today. And just looking at the data, basically what we wanted to look at is once we kind of got into these, you know, these conflicts, what happens next? What happens a month from now, six months from now, a year from now, three years from now in each one of these areas. And not surprisingly, you know, some are good, some are bad. You know, there’s no kind of ⁓ uniform, hey, three months later, it’s always great. But what we find is,
If I just kind of look at on average of let’s say the last 15 of these conflicts, one year later, 64 % of the time markets are positive. So that means 36 % of the time they’re negative. That’s not much different than every given year in the market, by the way. It’s about the same. So what that means to me is that you shouldn’t be basing your investments on whether we’re in a conflict or not. That has not been predictive of whether the next 12 months is going to be.
positive or negative. And the average return is a little bit lower, but it’s still very positive. 7.1 % on average. The market’s higher 7.1 % a year from now. If you go out three years, it’s a little bit better. 92 % of the time after we get into a conflict, the market is positive three years later. The average cumulative return, so if you add up all those three years, has been 29%. So a little bit less than 10 % a year, you could expect.
at least on the average of these 15 periods that we’ve had. So again, going back to, for most of us that are investing, our time horizon is more than three years, or it should be if you’re investing in stocks. And when you look at the data, it’s overwhelmingly, at least in history, it makes sense to stay invested or to keep investing through these periods because three years later, 92 % of the time the market’s positive.
Do Bonds Still Diversify? – Revisiting bonds after recent market environments
Marcus Schafer
Yeah, stay investor or keep investing. It’s kind of the way I look at that question to rephrase it how a portfolio manager looks at it. Is this an opportunity to rebalance back to my ideal state of the portfolio? That’s how we think about it. That’s how the big investment managers are thinking about it is, is this an opportunity to get closer to what I want my portfolio to be in the long term? ⁓
And so if you view it through that lens, if you had say some extra cash sitting on the sideline and, this might just be the spark. Okay. Fine. ⁓ You know, we, don’t know, but getting closer to your portfolio, given equity markets have run up, it’s probably buying bonds. So it’s not the worst thing. If you’re an accumulator like me, my next paycheck that goes into my 401k is kind of, that’s, that’s a little bit cooler than the last one, but whatever, you know, that’s a rules-based system kind of happening in the background. So.
I think there’s what action should you take and then can you feel a little bit better? Yeah, I think you can feel a little bit better. ⁓ The last question I want to talk about is what does this mean for bonds as diversifiers? I just kind of mentioned, hey, since stocks have kind of cumulatively been up over the past few years, target portfolios are likely slightly overweight stocks. So you would be purchasing bonds.
inflation expectations potentially rising. We kind of saw this in 2022. Our bonds still great diversifiers. Would love you to open with that.
Pat Collins
The short answer is yes, I believe there are very good diversifiers. ⁓ You know, I think some people think, when stocks are down, bonds always go up. And that’s why it’s a great diversifier. That’s in technical terms, if you had that, that would be what’s called negative correlation, meaning when one goes down, the other goes up. That’s not really the case with bonds. Bonds are more closer to a zero correlation, which means they’re independent of each other in a lot of ways. So we’re in this environment where bonds are basically flat this year.
and stocks are down slightly. So, you know, some people might say, well, it doesn’t seem to be working. When the stock market was going down, bonds weren’t going up. Sometimes that happens, but it doesn’t mean that the stocks going down were driving the bonds down or anything like that. There just happened to be the case. So when we look at bonds, though, you still want to go back to what is a bond and why would it be a good diversifier? I think that all of those characteristics are true, which is ⁓
Bonds are essentially IOUs. You are giving your money to a government, to a company, to a state municipality or something like that, and they’re promising to repay it with interest over some period of time. It’s completely different than a stock. The stock you’re just getting a share of future cash flows, basically, you have ownership in a company. Stocks can go to zero, companies can go out of business, companies can go through long stretches of really struggling.
Bonds are a little bit different. Yes, companies can go bankrupt, but in general, as long as that company is around, they have an obligation to pay it. So for most people, bonds are a good diverse fire in the portfolio, provides stability, safety, income. None of those things have changed. I still think it’s a really good tool to have in the tool belt for a lot.
Marcus Schafer
investors. Yeah. And when I get this question, I think the anchoring point is 2022 when stocks fell and bonds also fell. And so maybe just highlighting potentially a few different points from there that I think is important to consider. Going into 2022, rates were really low, which means you have a low kind of think about it as a coupon, as a hedge against future rising rates. So if your rate’s zero,
What Should You Do? – Knowledge, Confidence, Discipline
and it goes up to 1 % and you have a one-year duration bond, you lose 1%. Well, fast forward to today, where rates are three and a half to four and a half, kind of zero to 10 years. If you have that same one-year duration bond and rates go up 1%, you’re still getting a 4 % coupon. So now your future return for the year is kind of 3%. It’s not the end of the world, but you have this higher starting value.
that helps protect against future increases. And that really just makes the bigger question, making sure your bond mix is appropriate, right? And for most investors, things like long-term bonds are actually gonna have volatility that maybe looks a little more stock market-like. So maybe you should think about not doing things like that and trying to figure out the right balance. So there is some nuance to that question, but I think it’s absolutely fair. There is potential.
for uncertainty when it comes to interest rates. But that doesn’t mean that to your point, bonds are still not a great diversifier because it’s about the combination between your bonds and your stocks, getting you back to that average.
Pat Collins
Yes, yeah, totally agree. And I think that, yeah, I haven’t heard many clients complaining about bonds necessarily, ⁓ other than I wish they earned more, but that just kind of you kind of have to take what they give you in a lot of ways. ⁓ You know, when you have low lower rates, we usually don’t tell people, well, just get out of your bonds and put it into stocks because you’re just completely changing the risk profile of your portfolio. But ⁓ but yes, we still believe bonds
are very good investment to have in your portfolio for certain investors that just don’t wanna deal with the volatility of the stock market or need some little bit more stability. Maybe they need that because of retirement income or different things like that. maybe we could just end with just kind of final talking points of like, well, what should you do? I think the one thing we’ve hopefully stressed through this is not much. We don’t think you should be tinkering too much with your portfolio, but I don’t wanna say there’s nothing you should do.
through these periods when you see market declines of 10 % or so, or more maybe. So one is, is that it is always an opportunity for two things in my mind. One is rebalancing your portfolio. So is this changing the mix that you have outside of what your kind of stated goals are? So if you wanted to be a 60 % stock, 40 % bond portfolio investor,
has it changed substantially off of that? And if it has, it’s probably an opportunity for you to bring it back in balance so you make sure you keep the same amount of risk that you were hoping to have in your portfolio. The other part I would say is, does this give you an opportunity to save money on taxes? So have things that you’ve purchased recently gone down in value as an opportunity to take some losses so you can use them against future gains called tax loss harvesting. We’ve talked about it in prior episodes.
So those are just simple things that we think investors should just be looking at whenever there’s periods of kind of dislocation in the markets. Because remember, not everything’s kind of flat. There’s things that are up a lot and there’s things that are down a lot. And so you may be able to have opportunities to kind of ⁓ trim your portfolio, prune it, get it back into tolerance and make sure that you’re taking advantage of everything you can from a tax perspective.
Marcus Schafer
Yeah, I think those are actions you take with your portfolio and all kind of, I thought what you said actions you should take personally, I think are as powerful, which is education, getting the right perspective. That’s not clickbait or doom scroll, but hey, let me try and become more educated about what this means for stock markets. That leads to confidence and that confidence leads to discipline. And then, you know, it’s rinse and repeat.
Right. Like I think a lot of our clients, you know, they’ve been through this a few times with us. And when you’ve been through it a few times, you get more confidence each time. Some people like to check back in and get, Hey, like, let me just make sure I, you know, we, get this comment all the time. That’s a, it’s kind of like, I know what you guys are going to say, but I just kind of want to hear it again. That’s not the worst thing in the world. That’s actually a very good.
sign. So thank you for for sticking with us. And with that, we’ll sign off.
Sources:
(1) Tariffs: Is This Time Different? | #6 (Greenspring Advisors, 2025)
(2) Do Large Oil Price Moves Impact Future Market Returns? (Greenspring Advisors, 2026)
(3) U.S. Market Returns After Major Conflicts (Greenspring Advisors, 2026)
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