Change is the only constant in life. What goes up, must come down. Bad times transition into good times. All aspects of life move in cycles. The good times, or bad, never last forever and assuming that they will is a big mistake.
We see this theme play out in Sefer Shemot, with a major change in Bnei Yisrael’s life in Egypt. While Sefer Bereshit had the Jewish people living in peace with their Egyptian neighbors in Goshen, in Shemot a new Pharaoh ruled Egypt who viewed the Jews as a threat, appointed taskmasters to make them work harder, and decreed death for their male children. Needless to say, the Jews suffered greatly due to this new leadership. It’s hard to determine if this transition was sudden or a more gradual shift, but by the time the change occurred, Bnei Yisrael became enslaved with seemingly no options to become free.
Things change in the market, as well. In fact, cycles are seen throughout market history. Here are just a few examples:
The largest and most successful companies change decade to decade: In 1990, the three largest U.S. stocks were IBM, Exxon, and General Electric. In the year 2000, General Electric was the biggest, followed by Exxon, and then Pfizer. By 2010, Exxon was the largest followed by Apple, and then Microsoft. As of this writing, the largest stock is Apple, followed by Nvidia, and then Microsoft. Interestingly, Exxon, Pfizer, and General Electric don’t even make the top ten largest stocks today. Investors that stayed in yesterday’s winners likely ended up with lackluster performance.
Market dynamics shift. In the 1980s, investors enjoyed very high interest rates. High rates proved to be positive for folks in retirement. Retirees were able to buy FDIC insured CDs, highly rated municipal bonds, and U.S. Treasuries that all garnered double-digit returns. These high rates, or yields, became the focus of many investors. Over the ensuing years, rates dropped dramatically. Folks who were still focused on high yielding investments instead of companies that have other growth characteristics missed tremendous upside potential.
Asset class performance also doesn’t remain constant over time. Intermediate treasury bonds had an over 11% annualized return in the 1980s. Over the past decade (2014-2024), treasuries returned just over 1.3% annually, underperforming inflation. If retirees relied strictly on Treasuries, they would have lost buying power and effectively have far less money today than a decade ago.
The hottest sectors vary over time. In the late 1990s and early 2000s technology stocks saw a meteoric rise. Much wealth was created as investors flocked to invest in technology stocks. Unfortunately, the implosion of the Dot.com bubble saw much wealth eroded. In fact, it took the tech sector around 15 years to fully recover, with the tech stocks finally reaching a new all-time high in 2015. That is a staggering amount of time to experience no returns on your money, just to recover your initial investment.
Past investment axioms can also change. There is the often-repeated phrase that “real estate only goes up in value.” While real estate has gone down in many parts of the country over the years, which disproves this point, there is no example more potent than during the Great Financial Crisis. During the GFC, the U.S. real estate market was decimated in a few short months. Investors also learned that no company is “too big to fail,” as large historied companies imploded overnight. Companies like Bear Stearns, Lehman Brothers, and General Motors vanished. Many other blue-chip stocks that investors relied on for their “safe” dividend took years to recover their losses.
Today’s Market: The concept of change is particularly important to discuss today given the incredible run up in the S&P 500 (the 500 largest U.S. companies) and U.S. technology stocks. Since 2009, aside from a few brief interruptions, these areas of the market have continued to rise. It’s common for inexperienced investors, or those who began investing after 2009, to assume that these areas of the market will only go up. As we see from the aforementioned examples, things change and can do so on a dime. While I already highlighted how the technology sector imploded and took 15 years to recover, what’s less well known is that from January 2000 through December 2009, the S&P 500 experienced no growth at all. This wasn’t the only time in history where this popular area of the market remained stagnant for a decade or longer. Experiencing no growth for a decade can change the trajectory of an investor’s financial life.
Preparing for change: The best way to manage the inevitability of changing market dynamics is to plan ahead. In the context of investing, this means always embracing a philosophy of portfolio diversification. Diversification is the concept of spreading your investments into multiple areas of the market. This necessitates having exposure to both large and small U.S. stocks, domestic and international investments, stock and bonds, and so forth. (Note: Diversification does NOT mean having accounts at a dozen different institutions. This is just a mess and offers no diversification benefit.) Diversification allows folks to manage risk in their financial life. If one area of the market plummets, others will do well and vice versa. Unfortunately, it seems like risk management goes out the window during every Bull Market. Investors have a short memory. They only seem to remember the recent hot stock market, while conveniently forgetting the past economic downturns and stagnant markets.
It’s hard to make changes when your current investments are doing well. After all, why make modifications if everything appears to be working? The reality is that failure to take steps to minimize your investment risks today can lead to much more challenging circumstances when markets shift and your investments drop in value. Concentrating investments, instead of diversifying, may set investors back years financially. We’ve seen this story repeat itself throughout history.
Remember, the key to investing is managing risk so you can achieve your goals. It is not to gamble your financial future on one area of the market, like the NASDAQ or S&P 500.
Back to Pharaoh: I don’t know if Bnei Yisrael could have planned ahead and taken precautionary measures for when a new, less compassionate Pharaoh presided over Egypt. Perhaps it was divine intervention that the Jews found themselves oppressed so Hashem could redeem us, make us into a great nation, and give us the Torah. However, in the area of investing, we can certainly plan ahead. No one has prophetic ability to determine what G-d’s plan is for the market. Therefore, we need to diversify our investments to minimize our risk, increase the probability of achieving our goals, and avoid potentially devastating financial consequences.
Change is inevitable. Investors should plan accordingly.
