There have always been and will always be points in time where investors pivot from wanting return on their capital to just plain wanting their money back. The exact factors that take the collective emotional state from greed to fear are different every time and impossible to predict, but so long as humans remain in control of their own decision-making, along with their full array of emotions, arrive they will. We can think about these swings between greed and fear over multiple timeframes – ranging anywhere from intra-day to the very long term, almost generational cycles. We can also think about the suite of factors driving emotions along this spectrum of timeframes as fewer and more simplistic in the near term and growing more numerous and complex as we get toward the longer-term part of the spectrum. An example of this might be one’s decision to buy a stock today only to see it immediately drop in price later that afternoon. There will be some level of fear, but probably not enough to liquidate an entire portfolio. Rather, if over twenty years of investing, that same investor came to learn that these fluctuations almost never amount to lasting losses, and markets always bounce back in short time, then it will take substantially more to induce true panic and fear that leads to action. Importantly, however, when fear-inducing factors ARE sufficient to create genuine angst and panic after years of being rewarded for ignoring it, the corresponding reaction isn’t just to sell a couple portfolio positions, but rather to demand a total return OF capital. It’s our contention that because of all the learned experience over the last 15 years, specifically around complacency and markets always bouncing back, we are primed for one of these return of capital moments where investors indiscriminately sell whatever they can in an effort to keep their portfolio values from falling further. It’s a bit akin to a game of chicken with a car. The more times you’ve played the game and have experienced your friend swerving out of the way at the last minute, the less likely you are to panic the next time. Eventually, however, a driver comes along who is deranged enough to hold his line, and by the time you realize it, you have to react much more violently to escape disaster if you manage to escape at all. Being conditioned for complacency inevitably leads to much bigger mistakes and more violent reactions when they eventually occur.
We could delve into the host of factors to watch out for that have the potential to trigger this return of capital cycle, but it wouldn’t accomplish much. When markets are complacent, they shrug off almost everything. Remember, market participants have been conditioned not to take risk seriously, because it seems never to amount to anything. Perversely, this even means that the prospect of World War III fails to rattle markets. It likely won’t be until investors en masse are impacted directly in some way that markets begin to assess risks rationally. Whether that’s some sort of threshold level of unemployment, market loss, or global conflicts making their way closer to our shores, what every investor should be prepared for is the suddenness of risks materializing all at once after years of not. Trying to arrest a sudden, widespread selling panic in today’s historically stretched financial markets could be akin to trying to catch a massively ripened coconut dropped from 100 feet. A five-foot drop, reflective of normal market conditions? No problem. Bend at the knees, absorb some of the energy, and keep it from slipping through our grasp and exploding on the ground. Good luck pulling that off from 100 feet. The law of inertia says save your arms and hands and let that one go. Although policy makers, corporate leaders, and other public figures who are financially incentivized to maintain the status quo would prefer you believe otherwise, there is nothing they can do to keep the inevitable from eventually happening. Complex systems always find their way toward entropy. It’s because we intentionally seek to avoid conflicts that aren’t in our clients’ best interests that we can say, rest assured, those at the top of the financial food chain will make sure they see the return of their capital before the average Joe even thinks it important to get the return of theirs. That’s just the way it works. The people closest to the financial spigot and its flow of capital into and out of the economic system see and can react to the direction of flow first. This doesn’t mean the rest of us have to get “hosed” – we just need to evaluate conditions objectively and think a few steps ahead. We can control that.
Here’s how we do it. First, rather than staring longingly at those giant coconuts way up there in the tree, we think about what happens when they eventually fall – which history, human nature, and cycles inform us that they almost certainly will. Inertia will not be our friend if we spend too much time directly underneath that big, heavy, overly-ripe coconut. We’ve talked about reverse indexation and passive flow reversal being factors that can perpetuate the carnage within the biggest, most popular parts of the stock market. Unless our plan is to hold these things for 20 to 30 years before selling, there are issues. Second, we think of and consider investments that are more akin to fruit on much lower branches of the tree. Sure, they can fall and bruise some, but the speed at which they fall given their lower altitude makes them much more catchable or salvageable in the event they slip through our fingers.
In short, now’s the time to stay focused on investing in those things that should be most liquid when panic ensues; those things that aren’t widely owned and won’t experience historic selling pressure when the flow of money that’s funneled into these investments over the last 15 years comes rushing out. Owning the less popular, more reasonably priced, quality investments that people will seek out once they suddenly realize that return of capital is more important than return on capital, is the opportunity here. Here’s the critical thing to remember though…If you do this right, you won’t find much company, and you have to be okay with that. The eventual reward is not having to share misery with all that company.
Editor’s Note: This article was originally published in the July 2025 edition of our Cadence Clips newsletter.
Important Disclosures
This blog is provided for informational purposes and is not to be considered investment advice or a solicitation to buy or sell securities. Cadence Wealth Management, LLC, a registered investment advisor, may only provide advice after entering into an advisory agreement and obtaining all relevant information from a client. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
Past performance is not indicative of future results. It is not possible to invest directly in an index. Index performance does not reflect charges and expenses and is not based on actual advisory client assets. Index performance does include the reinvestment of dividends and other distributions
The views expressed in the referenced materials are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
