Most investment professionals hold a particular set of beliefs about stocks and bonds—specifically, that stocks are the riskier of the pair, whereas bonds are frequently perceived as safer.
We, however, know the opposite to be true. Our investing framework leverages the simple fact that volatility is not something to be feared—but rather, an important tool in the savvy investor’s toolbelt. We believe the answer to volatility is not to avoid or minimize stock ownership, but to take a longer-term purview and make educated investment decisions based on one’s personal goals and intentions.
Overview: 5-Year Cash Strategy
One of the core strategies we use to help our clients make sound, long-term investing decisions for their unique situation and goals is our 5-year cash strategy. Using the above principles, we typically encourage our clients to invest their money in a blend of stocks and bonds based on how readily they’ll need access to their funds.
Simply put, any money that’s needed within the next five years is invested in bonds, rather than into the stock market. The reason for this is that, on average, when there’s a bear market (a drop of 20% or more in the stock market), it typically takes about 40 months for the stocks to regain everything that’s lost. We round up to 5 years for the sake of being conservative.
– 40 Months to recovery sourced from “Bear markets may not be as ferocious as they appear”, Mark Hulbert, Wall Street Journal, March 8-9, 2014.
By laddering bonds in such a way that the client always has access to the cash they need in any given year while the rest remains invested in excellent companies, the client is able to draw income from their investments, without sacrificing potential growth.
Leveraging Fifth-Year Bonds In the 2020 Bear Market
At the top of the 2020 bear market, much was still uncertain in regards to the COVID-19 pandemic. However, we could see that the event-based bear market offered an amazing opportunity for our investors to reap huge rewards in the stock market.
In order to take advantage of the bear market buying opportunity, we decided to leverage our client’s fifth-year bond—that is, the bond that would mature during the fifth year of their 5-year Cash Strategy.
Essentially, we sold clients’ fifth-year bonds, converting them into cash. We tracked the best opportunities in our clients’ portfolios and strategically invested those proceeds into our top-rated, most excellent companies while their stocks were dramatically undervalued. Even though stock prices had dropped, we were confident that, based upon the companies’ historically positive performance, it was only a matter of time before stock prices rebounded.”
Results of Selling Off Fifth-Year Bonds
If anything was more surprising than the 2020 stock market drop, it may be the market’s speedy rebound. Within about a year of selling off our clients’ fifth year bonds in order to invest during the 2020 bear market, the S&P 500 had increased nearly 80% from the March 2020 lowpoint.
For our clients, this could only mean one thing: a major financial win. As the market continues to recover, our clients are consistently experiencing impressive gains that would not have been possible if we hadn’t acted quickly when the market dropped in 2020.
Just as important as our clients’ Return on Investment was their Return on Intention. By leveraging their fifth year bonds to take advantage of market volatility, our clients were able to continue supporting excellent companies doing great work during a global crisis, in a way that fully aligned with and supported their personal and financial goals.