The price of fixed-income investments is not just in the return that you lock in, but also in the future returns you give up by being out of equity markets.
The cyclicality of markets and investing is often recognised at the macro level: bull and bear markets, commodity supercycles, and the outperformance of value or growth stocks at various times, to name just a few.
I can recall two occasions when the flight to guarantees was tempting and popular – in the early 2000s and after the 2008 Global Financial Crisis period. During both these periods, one ultimately wanted the ability to take advantage of market opportunities, but guarantees and fixed deposits often require giving up that flexibility.
In the words of author Robert G Allen: “How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.” While cash and fixed-income investments play a hugely important role in meeting short-term and income needs as part of an overall balanced portfolio, those investing for the longer term need to reliably outperform inflation and grow their wealth in real terms.
Consider the sharp upward spike we often see following a deep market low, like that following the Covid-19 crash. The difference between returns when investing at the top of bull market euphoria versus bear market fear can be substantial. ADVERTISEMENT CONTINUE READING BELOW In the scramble to guarantees that we often see amid equity market lows or protracted mediocre returns, this is often what investors forget.
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