My 3 year-old son is really into playing Hide-N-Seek lately. Here’s how it goes:

- I say “Go into your room and count to twenty.”
- He does it and I hide.
- He walks around a while and then finds me. For the sake of this story let’s say he finds me behind the couch.

You know, pretty standard Hide-N-Seek stuff.

We go through the same ritual at the start of the next round — he counts, I hide.

In the second round, the first place he always looks is where he just found me in the prior game (behind the couch), but of course, I’m not there.

Eventually he finds me and we repeat the game.

At 3 years old, my son’s strategy to win the game is driven by a lot of innate behavioral programming. This is why he goes right back to where he just found me — recency bias is ingrained into his psyche.

This same recency bias is what has investors running into investments after things have been good and away from them when things have been bad.

But here’s the thing…

…Stocks have been bad recently (The S&P 500 was down 19.4% last year).
…Bonds have been bad recently (The US Aggregate Bond index was down 13.01% last year).
…Real Estate has been bad recently (The Dow Jones US REIT index was down 25.09% last year).

So if you’re running from stocks, bonds, and real estate, what else is there?

Well, let’s start with what investors receive after they hit ‘sell’ on their stock, bond, or real estate investments: CASH.

Should you be hiding in cash?

In a year like 2022 where nearly everything declined, cash was one of the few asset categories which largely stayed afloat.

However, after the failures of Silicon Valley Bank, Signature Bank, and Credit Suisse, I understand everyone’s trepidation for holding too much cash —You work for decades, save money in the face of endless temptation not to, and invest some of those funds realizing you could lose them in exchange for upside growth potential. But you also keep some cash on the side and don’t expect it to evaporate… It’s a scary thought that it might.

With these new fears creeping up, here’s how I’d encourage you to think about cash to help manage those fears:

Over the last 3 years we’ve seen the purchasing power of a dollar decline by about 14%… So your $100,000 in deposits from 2020 now give you the same power as $86,000. Always remember that your cash is already evaporating due to inflation if you don’t have it invested.
Do you have more than $250,000 in cash? If so, maybe rethink that. The FDIC coverage can be an important consideration, but this is also a very large amount of cash to be doing nothing to move the needle forward.
I’ve been talking with clients a lot lately about the notional differences between deposits backed by the FDIC and Treasury Bills. There are some nuances between the two, but I generally believe the US government is backstopping both. One pays attractive interest rates and the other doesn’t. Choose wisely.
(You might have some questions about the decline of the US Dollar in light of recent events. I’m already working on this blog and will post as soon as I’ve teased out the noise from the substance. Stay tuned.)

Cash is great as a medium of exchange in the short term, but that’s about all it’s good for. I think running to cash right now is a little like my son going right back to the place I was hiding in the previous round of Hide-n-Seek — it worked the first time around but would have been a terrible place for the second round of hiding.

But this isn’t just about cash. Recall the Asset Class Tapestry we made earlier this year:

The above shows how variable the returns in different asset classes are and how rarely things stay on top for consecutive years.

This is true when you look at asset class performance (stocks, bonds, real estate, cash), individual country performance (US, Japan, China, etc.), or top-performing funds (this 30 second Youtube clip will show how unlikely it is for funds to repeat top performance).

So… Where can you hide your money when things get tough?

The Answer: You should ‘hide’ your money in a story you can believe in.

That’s right, a story.

To highlight this, think about Jeff Bezos.

But not this Jeff Bezos:

Think about this Jeff Bezos:

Amazon.com was started as an online bookstore by Bezos in 1994 from his garage. Within a year, they expanded to a two-room bedroom house (pictured above). The rest is history.

Here’s a chart of some of that history (i.e. the growth in Amazon stock price since it went public).

So, Adam, what does this have to do with "investing in a story”?

I’m glad you asked. Take note of the above section I’ve circled in red.

Within that red circle was a daunting period for Amazon stock. In fact, from 12/31/1999 through 9/28/2001, the stock price fell 93.32% (!). You can barely notice the decline on this chart but I assure you it was a big deal at the time.

So, how does Jeff Bezos stick with his investment through that kind of enormous downswing?

That’s right, a story.

When things got tough he didn’t question what he was doing and ditch his tech startup to go establish a bank or something (the S&P 500 Financials Index was up about 3% during that same period). He believed in his approach and stuck with it.

While I firmly believe that a good financial advisor typically discourages investors from owning a large amount of concentrated stock (because there are just too many things which can go awry with a single company), this is an example of allowing your purpose and dedication to your approach get you through difficult periods.

Your Story

To start building your story to get through difficult markets, ask yourself two questions:

1) What am I investing for?

The answer to this question gives you a timeline. If you don’t have time on your side then you pick a more conservative approach. If you do have time on your side then you can be more aggressive…. You’re probably investing for several things (retirement, vacations, etc.), write them all down and be as specific as possible.

2) Do I actually need the money being invested or would it eventually pass on to people and causes I care about?

If you don’t need the money then you can take more risk (you’d better not need the money you use to buy lottery tickets). If you absolutely need the money then you must be more conservative (the money you plan to use to put food on the table and a roof over your head in retirement should be invested accordingly).

When you answer the two questions above in a story format it gives you a sort of Statement of Purpose.

From this statement of purpose you can develop strategy. Then remember the good times come and go, so make sure you’re adopting something you believe in to get you through rough patches.

…This is where we look to start formulating strategy for clients.

In my case, here are some things I believe in:

Diversification is important but it means you’re likely to always own something that’s not performing as well as you like (but, presumably, that investment’s time will come). Get used to potentially disliking some parts of your portfolio.
Costs matter. Fund expenses, trading costs, advisor fees, etc. Keep them as low as you reasonably can.
Investment prices today are a window into what people think will happen to an investment in the future. If a “future thing” happens and the investment price doesn’t move afterward, don’t be surprised.
Liquidity is important. Try to avoid investments that are hard to get rid of.
Market timing is a fools’ errand. You might get it right a few times but the odds aren’t in your favor if you want repeated success.
Global diversification can help serve as a hedge against the decline of US economic dominance.
Tax optimization is nearly as important as investment selection. However, don’t let tax avoidance keep you from ditching a potentially-bad investment. It’s better to sell and pay taxes than to hold and watch your gains wither away. The only way to never owe taxes on an investment with significant gains is to die… Not a strategy I recommend.

While I believe the above principles are important, there are countless ways to build wealth — some will claim real estate is the key, others only buy individual stocks, many of us prefer diversified mutual funds and ETFs, etc. No one is right or wrong, Again, find the thing you believe in and stick with it.

One Final Point: Luck

In 2022, a New York man named Juan Hernandez became one of the most famous examples of someone who has hit it big despite terrible odds. Not only did he win the $10 million prize on the state’s $10 million deluxe scratch-off game in 2019, but he did it again in 2022. The odds of winning the jackpot once is about 1 in 3.5 million.

If you asked Juan about his wealth-building journey he’s bound to think winning the lottery isn’t as hard as it actually is. If you wanted some strategy he might say things like “if you want to improve your odds, think positive thoughts and use your lucky penny to scratch off the ticket.”

Similarly, Jeff Bezos might think you’re dumb if you don’t put all of your energy and effort into making one stock investment pay off.

The reality is luck plays a formative role in how we think about investing. As you’re deciding on a story to believe in, make sure the protagonist (you) doesn’t need too much good luck to end up winning.

That’s all for now,

Adam Harding
CFP | Owner & Advisor | Smartvestor | Easter Candy Tax Man (33% Tax Rate)
www.hardingwealth.com

This blog is for educational purposes only and should not be considered investment, tax, or legal advice. Past performance is not indicative of future performance.