Quarterly Commentary | Q1, 2025
Author: Jason Kirchhoff
The headlines the first few months of the year have been filled with tragic stories of plane crashes and other near misses. The intense news coverage of these incidents has caused some people to be hesitant about flying. According to an Associated Press poll in February, the overall percent of people who think that traveling by plane is safe dropped from 71% to 64% in just one month. In his book Risk Savy, How to Make Good Decisions, Gerd Gigerenzer uses the fear of flying as an example of how difficult it can be to make good decisions when we are inundated with fear and emotion. He highlights that if you drive more than seven miles you are statistically safer on a nonstop flight than you are in a car. So, by trying to avoid the risk of flying, people who drive are trading one risk to accept a much larger risk.
The start of 2025 has also been filled with numerous examples of headline risks for investors: tariffs, geopolitical strife, market corrections, debt growth, etc.…. These news stories, headlines, and shifting narratives can create the same type of risk avoidance reaction as the news stories about plane accidents. Investors may seek the “safety” of cash in response to some of the events mentioned above. But much like the risk tradeoffs between flying and driving, there can be a higher cost for presumed financial safety. In the academic paper, Long-Horizon Losses in Stocks Bonds and Bills, Anarkulova et al. (2023) attempt to quantify the chance of losing money after inflation over 30-year periods. They determined that the probability of a real (after inflation) loss for global equity investors is under 10%, but if you hold cash equivalents such as T-bills, the probability of a loss jumps to 37%. These statistics don’t even incorporate the relative tax inefficiency of cash and T-bill returns via taxable interest income vs. more tax-efficient long-term capital gains and dividends for global equities.
One of my favorite quotes related to investing is from the great market historian, Dr. Thomas Sowell - “There are no solutions, only tradeoffs”. This simple statement encapsulates the problem of dealing with risk and uncertainty. There are no guaranteed solutions to managing wealth. Therefore, our portfolio construction process is grounded in making decisions based on a thorough understanding of the tradeoffs between different investments, over different time horizons and how investments integrate with our client’s unique financial plans. This usually requires filtering out most alarming headlines and short-term market movements, so we don’t unwittingly exchange one risk for another.
Most continue to view air travel as a safe mode of transportation - AP-NORC
The opinions expressed are those of Jason Kirchhoff and McGill Junge Wealth Management as of the date stated on this communication and are subject to change. There is no guarantee that any forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Please remember that all investments carry some level of risk, including the potential loss of principal invested. Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance and are not indicative of any specific investment. Diversification and strategic asset allocation do not assure profit or protect against loss.
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