Why investors need to guard against 'breakevenitis'

As initial bull market rallies build, investors who are raw from the prior market drop sell — but that may be a mistake. Reuters

The rise recorded by world stocks in 2023 has led to calls to ditch them for “safety”.

With money market funds and US Treasury bills now yielding up to 5 per cent and stocks recouping much of 2022’s brutal declines, why risk financial “contagion” and another bust?

Thinking that suffers a classic — and expensive — behavioural trap: “breakevenitis,” a term I coined decades ago. Let me explain.

In early March, I told you selling stocks early in a bull market — which seemingly started last October — could be disastrous.

Then came Silicon Valley Bank’s implosion. Credit Suisse’s, too. And renewed recession fears and worries over commercial real estate proving “a second shoe” yet to drop.

Calls to seek “safer” assets like cash and bonds rose … alongside stocks!

Through to April 24, global stocks were 3.5 per cent higher than pre-Silicon Valley Bank levels, creeping ever closer to their pre-bear-market peak.

Enter breakevenitis. As initial bull market rallies build, investors — raw from the prior drop — sell. It feels smart. It provides a dual emotional boost: minimising regret from selling super low and accumulating pride by dodging a feared drop.

Sometimes, the trigger is the prior bull market high — sometimes, it is an arbitrary portfolio value. It may even be about a single stock or three.

Regardless, breakevenitis makes many think “fool me once … but not twice” — using the allegedly “false” rebound to justify getting out.

With global stocks up 20 per cent from last autumn’s lows and fears everywhere, breakevenitis pressure builds.

Consider fund flows. The week of March 10 — as SVB collapsed — investors yanked $7 billion net from equity mutual funds. Since then: another $32.6 billion.

Yes, that is mild compared with the $41 billion outflows in the week of March 27, 2020 — amid the initial Covid-19 lockdowns — but it reveals brewing breakevenitis.

Meanwhile, headline-hyped money market funds had net inflows for five weeks straight before the streak stopped in mid-April. In the week ended April 5 alone, investors piled $42.5 billion into them.

Maybe that seems sensible. But stocks were rising before and since SVB’s failure.

Breakevenitis is rooted in “myopic loss aversion” — the psychological tendency to feel a loss’s pain vastly more than liking an equivalent gain.

Avoiding losses feels right. Hence, past afflicted investors flock to “safe” assets. Relatively high cash-like yields boost that appeal now.

I have long labelled the market The Great Humiliator — and breakevenitis is among its favourite tricks.

If you need growth to finance your longer-term goals, arguably the biggest risk you face is missing bull markets’ big, long-term returns.

Yes, money market funds yield approximately 4.5 per cent. Three-month US T-bills offer 5 per cent. Sounds great after stocks’ 2022 swoon!

But think longer-term: Using America’s S&P 500 for its longest accurate history, stocks average 10 per cent annualised since 1925 — fully double today’s “safe” yields — including all past bear markets.

The difference between 5 per cent and 10 per cent may seem small here and now.

But the magic of compounding is stocks’ superpower. After 25 years, $500,000 compounded annually at 10 per cent becomes $5.4 million.

At 5 per cent? About $1.7 million (largely devoured by inflation). Even at 8 per cent, stocks double that — more than $3.4 million.

Those hypothetical calculations highlight a humongous risk: earning returns too low to finance your goals over your lifetime.

People often dismiss “opportunity cost” as unimportant, intangible. Money not earned feels different from realised losses.

Invest for growth, let compounding’s magic work for you and don’t let recent turmoil scare you from stocks

Ken Fisher,
founder, executive chairman and co-chief investment officer of Fisher Investments

Again, myopic loss aversion! While that “safe” $1.7 million sounds big, over multi-decade retirements, it isn’t what it used to be — especially with pernicious inflation.

Stocks’ compound growth buffers against late life miserliness and worse. Without it, supposedly “safe” assets are a lot less safe.

Furthermore, will today’s 5 per cent “safe” yields last into that long future? I doubt it.

Some may say they will get back into stocks when things look better. But that is market timing. Few are good at it and there is never an all-clear signal in investing.

Capturing those strong long-term equity returns means you can’t exit at breakeven — or any other arbitrary level.

It means owning stocks much more often than not. After March 2020’s lockdown-induced plunge, rebounding world stocks broke even that August 24.

A theoretical breakevenitis-inflicted investor selling then missed another 34 per cent climb. Exiting after the 2007—2009 financial crisis bear market’s May 2013 breakeven point surrendered 75.5 per cent subsequent bull market gains.

Breakevenitis’s approach embodies entrenched pessimism — every new bull market’s foundation, building the proverbial “wall of worry” stocks climb.

While many will suffer breakevenitis, you can avoid it — by keeping long-term goals top of mind.

Why buy stocks to endure downturns and sell back near breakeven (or worse, at a small loss)? Invest for growth, let compounding’s magic work for you and don’t let recent turmoil scare you from stocks.

Ken Fisher is the founder, executive chairman and co-chief investment officer of Fisher Investments, a global investment adviser with $160 billion of assets under management