Investors are challenged with how to respond—if at all—to both the simultaneous downdrafts in stocks and bonds and muted expectations for market performance. Beyond disappointing short-term returns and a spike in volatility, investors face multidecade highs in inflation across much of the globe, the prospect of the end of a long era of “easy-money” central bank policies, the war in Ukraine, and the effects of the COVID-19 pandemic, including economy-disrupting shutdowns in China. The Federal Reserve’s interest rate hike this week was a capstone to an already volatile period.
The litany of economic and market woes might tempt some investors to go all in on cash, but that would be almost ensuring a negative return when adjusted for inflation. As the charts below illustrate, the chances of a negative real return are much lower for stocks and bonds compared with cash, particularly as the holding period gets longer.