By Gil Baumgarten and Micah Morris:

Investor behavior is rarely driven by statistics alone. More often, decisions are shaped by emotion; how outcomes feel rather than how likely they are. This tendency leads many investors to overestimate certain risks while quietly accepting others that are far more damaging over time. Understanding this imbalance is central to how we think about portfolio construction.

The Bogeyman of Market Losses

Many investors regard large market losses as their biggest fear, viewing them as the ultimate bogeyman. They are dramatic, highly visible, and heavily amplified by the media. Yet history shows that the emotional pain of market downturns is often far less destructive than the slow, compounding drag of taxes and inflation.

This perspective helps explain why approximately 85% of client assets at Segment are allocated to equities, despite the average client age being 61. On a dollar-weighted basis, the average age is slightly younger due to larger balances held by younger clients. More importantly, portfolio design should reflect objectives and risks, not age alone.

Some of our oldest clients hold no bonds at all, which runs counter to the world’s conventional wisdom. My own mother recently passed away at age 94, having tripled her assets tax-free since 2015 and not owning a single bond for the final two decades of her life. That outcome was not accidental. It reflects several structural advantages of equities:

• Tax Efficiency: Unrealized stock appreciation transfers to a surviving spouse or heirs tax-free, while bond interest is taxed annually which creates a long-term drag on compounding.

• Return Potential: Over full market cycles, equities have historically produced returns that are roughly four times greater than those of short-term bonds.

Inflation: The Quiet Erosion

Recent years have provided a vivid reminder of inflation’s corrosive power. Since 2017, U.S. M2 money supply has expanded by roughly 40%, with approximately 16% of that growth occurring in just the last five years. During much of this period, bond yields hovered near zero or in low single digits.

The mechanics are simple but uncomfortable: when money is created rapidly, the purchasing power of existing dollars declines. Assets that fail to grow faster than inflation are effectively moving backward, even if account balances appear unchanged on paper. The true long-term risk is not the episodic stock market volatility, but the government’s ability to dilute wealth invisibly with a mere stroke of a pen.

Embracing Stock Allocation

Our strategic allocation to stocks, currently at 85%, has yielded significant success, providing roughly a double in value for most clients in the past five years, and trouncing the rate of inflation that has much more negatively affected the meager returns in bonds. Even substantial equity drawdowns would still leave many clients ahead of where conservative allocations stood five years ago. In that sense, much of the capital at work today can fairly be described as “house money.”

While headlines continue to forecast catastrophes, we remain pragmatic. Portfolio shifts carry tax consequences, and reactionary moves often lock in costs without improving outcomes. We focus instead on maintaining discipline, managing real risks, and positioning portfolios for long-term success, not short-term comfort. Peter Lynch once said that successful investing was not necessarily one requiring superior intellect, but instead, a strong stomach. We find investors are far more likely to accept such risks if the action of choosing investments was not of their own doing. This is the primary explanation as to why investors who handle their own investing often significantly trail the results of clients who have advisors. They routinely de-risk to avoid the pain of self-examination.

We remain committed to guiding you through these turbulent waters and helping you navigate markets with clarity, discipline, and perspective.

Please see IMPORTANT DISCLOSURE information.