The Dawn of a New Investing 'Epoch'

Editor's note: We've been sharing plenty of reasons to be bullish here in DailyWealth. But as long as interest rates remain "higher for longer," investors will be tackling a different market than we've seen in recent decades. So today, we're sharing a piece from our colleague Dan Ferris, adapted from the October 13 Stansberry Digest... where he explains how to safeguard your wealth outside of an "easy money" environment.

And for more details, make sure you tune in to our online event tomorrow at 3:30 p.m. Eastern time... because Stansberry Research founder Porter Stansberry is back, for the first time in three years – and you won't want to miss the financial twist he's predicting now. Find out more right here.

When the "Bond King" looks in the mirror, he can't help but see "Lady Luck" over his shoulder...

"Bond King" is the nickname for investing legend Bill Gross. He's best known for founding asset-management firm PIMCO in 1971. He also ran its Total Return Fund, which was once the world's largest bond fund (with assets under management of $293 billion in 2013).

But Gross realizes he wouldn't have been so successful without a key outside factor. As he wrote in a 2013 piece titled, "A Man in the Mirror"...

There is not a Bond King or a Stock King or an Investor Sovereign alive that can claim title to a throne. All of us, even the old guys like Buffett, Soros, Fuss, yeah – me too, have cut our teeth during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience.

Since the early 1970s when the dollar was released from gold and credit began its incredible, liquefying, total return journey to the present day, an investor that took marginal risk, levered it wisely and was conveniently sheltered from periodic bouts of deleveraging or asset withdrawals could, and in some cases, was rewarded with the crown of "greatness." Perhaps, however, it was the epoch that made the man as opposed to the man that made the epoch...

In short, many folks don't understand the sheer luck they've had in the markets since about 1980...

Many investors have done well over that span. They've saved. And they've invested in stocks and bonds in their 401(k) accounts. Whenever the market fell, they just kept buying... And stocks have always recovered and gone on to make new highs.

I'm comfortable asserting that most investors alive today were either not in the financial markets in the 1920s – or if they were, they weren't old enough to understand them.

As a result, they have zero experience with any other type of market.

That's why so many of today's investors fail to realize the importance of different "epochs." Now, we're about to enter a new one – and investing is about to get a lot harder...

The period from 1980 to 2022 was the best time in the past century to be in the stock market.

Artemis Capital Management founder Chris Cole discussed this idea in his 2020 piece titled, "The Allegory of the Hawk and Serpent." As he wrote...

The last four decades were one of the most significant periods of asset price growth ever. A remarkable 91% of the price appreciation for a Classic Equity and Bond Portfolio (60/40) over the past 90 years comes from just 22 years between 1984 and 2007... Any strategy that overweighted Stocks and Bonds did spectacularly well during this unique period of financial history.

Cole is simply sharing the numbers that prove Gross was right. Of course, Gross isn't the only investing legend to see the market in "different epochs"...

Oaktree Capital Management Co-Chairman Howard Marks is another great bond investor of our time. In May, he wrote a memo to his investors called, "Further Thoughts on Sea Change"...

According to Marks, the most important event in finance in recent decades was "the 2,000-basis-point decline in interest rates between 1980 and 2020." And as he noted, "that decline was probably responsible for the lion's share of investment profits made over that period."

Then, Marks listed the likely outcomes of the "sea change" heralded by today's higher interest rates. I'm sure you'll recognize some of the things on his list... It includes slower economic growth, higher default rates, tighter lending standards, and less reliable asset appreciation.

Marks referred to all this as a return to "normalcy."

This is the catch. If I just told you things were returning to normal today without telling you what that really means, I bet most folks would think, "Oh... that's a relief."

In truth, the investing epoch since 1980 – when you could buy every dip with relative confidence – was highly abnormal when compared with other epochs over the past 90 to 100 years.

Today, two warning signs suggest that this "abnormal" epoch has finally ended...

The first warning happened in December 2018.

As Marks noted in his piece, interest rates were near zero in 2015 and had been since 2008. That didn't give the Federal Reserve enough (or any, really) room to ease credit conditions if another major crisis happened. So the Fed started raising interest rates.

The central bank successfully hiked the federal-funds rate's target range all the way up to 2.25% to 2.5% in December 2018. But at the first sign of trouble, the Fed abandoned its plans...

The market began falling in September 2018... And by Christmas Eve that year, it had fallen almost 20%. That was too much for the central bank. It started cutting rates again the following July.

The first warning sign is clear... The Fed couldn't even raise rates to 2.5% without the stock market tanking hard.

Something similar is happening in the stock market this time...

In March 2022, the Fed began its fastest rate-hiking cycle in more than 40 years. The major indexes tumbled last year in response. But one thing is different this time...

The Fed has made it crystal clear that it will keep rates higher for longer. And it will do everything in its power – and inflict as much economic damage as needed – to quell inflation.

The second warning sign came in March 2020...

Investment-management firm Vanguard controls more than $8 trillion, with 79% of that money in index funds. In a June 2022 report, the company looked back on the COVID-19 crash of early 2020...

The S&P 500 plunged nearly 34% in just 24 trading days from February 19 to March 23. It was a rapid, brutal decline. Yet during that time, Vanguard said, "less than 1% of households abandoned equities completely."

According to a Gallup poll in April 2023, roughly 61% of the 131.2 million U.S. households own at least some stocks. That's about 80 million households. So, when you factor in Vanguard's "less than 1%" figure, it means that less than 800,000 people dumped equities in March 2020.

As I asked in my September 1 issue of the Stansberry Digest...

What would happen if 2% of households sold all their stocks? Or 5%? Or 10%?

I've written before about extended "sideways markets." That's when stocks don't make new highs for decades...

The Japanese stock market has fallen as much as 76% from its 1989 peak. And 34 years later, it still hasn't eclipsed that previous high.

The Dow Jones Industrial Average fell 89% from its 1929 high. And the index didn't exceed that level again until 25 years later.

The Nasdaq fell 78% in the dot-com collapse. And it didn't return to its 2000 high until 2015.

I believe we're in for something like that again.

So, if mindlessly buying stocks and bonds won't work anymore in this new epoch, what will work?

First, you need to get used to the fact that it will be harder to manage your own portfolio.

That's true because you can't just focus all your attention on stocks and bonds. They'll continue to play a role (maybe even a big one), but you need to know what else works well.

That leads me to the next big point...

You'll have to learn to stop trying to optimize your portfolio and expecting all of it to go up every year. Instead, you'll need to start learning how to hold a truly diversified group of assets.

Some assets will perform well at times. Other assets will do well at other times. And overall, if you diversify properly, you'll preserve and growth your wealth over the long term.

Just so I'm clear about what true diversification means... owning a diversified portfolio of stocks is just a single asset class. That won't cut it.

Rather, you need to invest in multiple asset classes that perform well in various environments. I've consistently recommended the following collection as a basic truly diversified portfolio...

  • Cash
  • Stocks and bonds
  • Gold

Preserving your wealth is your new priority. Growing it must come second.

Now, all of this does come with a silver lining. One of the many bad things about interest rates at or near zero is that nobody is really an investor...

People can't earn a safe yield anywhere. So everybody takes on more risk and speculates for capital gains to grow their wealth. That frequently involves diving headfirst into stocks – and often at nosebleed valuations.

But now, we can earn a 5% yield on U.S. Treasury bills. That's an objective, risk-free benchmark for us to measure the attractiveness of all other potential investments.

In the end, that's part of the return to "normalcy" that Marks is talking about.

When we can earn 5% in T-bills or other government bonds, preserving our wealth becomes a little bit easier. We know we're going to get paid. And we know our principal is safe.

In short, income is back. And because of that, investing is possible again.

Look, I didn't say investing was easy. Those days are gone...

Investing requires work. But the good news is that we can now do it once again.

Good investing,

Dan Ferris

Editor's note: Tomorrow at 3:30 p.m. Eastern time, our founder Porter Stansberry will release what he believes could be the most critical financial story of his career. The last time he issued a warning this urgent was on March 24, 2020, in the thick of a market panic... And the simple step he told viewers to take didn't just position them for greater safety – it also gave them seven separate opportunities to earn 100% or higher amid the chaos.

What Porter plans to cover in tomorrow's interview could be just as vital to your wealth. And we can safely say it will be unlike any other financial briefing you've seen in years. Sign up here to tune in online.

Further Reading

"For most individual investors, the process of trying to manage their savings in the stock market is a lot like trying to cross the Rub' al Khali desert on foot," Porter Stansberry writes. If you're going to survive, you need the right tools in your toolkit... Read more here.

"Most people have no idea what happens when credit dries up," Joel Litman says. Companies and individuals took on a lot of debt over the past several decades. The U.S. got addicted to easy money. Now, that money is running out. And it's setting the stage for both crisis and opportunity... Learn more here.