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Invariant Q2 2022 Letter

Executive Summary

  • June capped off a quarter that most investors would like to forget. The S&P declined more than 16%, sliding into bear market territory for the year. This is the worst first-half performance since 1970.

  • Inflation is persistent: year-over-year CPI most recently came in at 9.1%, a 41-year high. The Federal Reserve raised 50 bps in May and surprised the market with 75 bps in June. They are poised to raise rates again by at least 50 bps in July.

  • We are breaking this quarter’s commentary into two parts. In Part I below, we discuss the big picture for long-term investors. In Part II (following shortly), we examine the valuation backdrop for stocks and the difference between “real” growth and nominal earnings.


Most flights experience turbulence, but planes are designed to withstand it. The percentage of the world’s 3 billion flyers/year injured due to turbulence is 0.00000193%, and 2/3 of those are flight attendants and passengers not wearing their seat belts. 5 Reasons Turbulence Isn’t Dangerous | Mountain Aviation When we published our first quarter commentary, it looked like the selling might have been contained to “just” a severe correction. Corrections come on average once a year and are nothing to get too excited about. When an unusually long time has passed since the last correction, the next one can feel quite scary. But like an airplane, diversified portfolios are designed to withstand turbulence and have an excellent track record of getting investors safely to their destinations. As we demonstrate in our study on drawdowns in the SPY S&P 500 ETF since its inception in 1993, stocks sold off:

  • 5% or more in 25/29 years.

  • 10% or more in 20/29 years.

  • 15% or more in 15/29 years.

  • 20% or more in 10/29 years.

Even after this year’s drawdown, SPY is up 1,410% cumulatively since inception in 1993. That occurred even though it sold off 15% or more within a year about half the time, and 20% or more over one third of the time. Now that is what I would call turbulence! The Frequency and Severity of S&P 500 Drawdowns (

Prudent investors should expect these corrections and use them as opportunities to tax-loss harvest and opportunistically buy their favored stocks and sectors at more attractive prices.

Of course, Southwest isn’t flying my Boeing 737 Mach 5 into a hurricane without radar. Comprehensive financial planning empowers an advisor to determine which investment options are suitable for their clients. Once these considerations are accounted for, it is our job as investment managers to deliver on our respective models’ mandate, and diligently follow the process.

Each one of our portfolios has constraints and parameters around overall portfolio risk, asset allocation, and how much tracking error we are willing to tolerate. We think our process will add value to a naïve strategic asset allocation portfolio over the long term, and the expertise we have in-house allows us to cater unique solutions to our clients to help them meet their goals (

“All In and All Out”

There are rare times that call for significantly increasing or decreasing overall portfolio risk within model parameters. This would occur in historically extreme market environments, as our analytical process lined up across every metric to suggest taking maximum offensive or defensive positioning. That said, it almost never makes sense to be “all in” or “all out” of the market. Even if you get that call right short-term, you then have to get another call right: when to get back in. And the history books are filled with people who perhaps made a prescient call to get out, but never got back in.

For example, let us say you had perfect foresight and sold all your holdings at the top in October 2007. We will look at two investors: one who was invested 100% in the S&P 500 (SPY), and another that invested in the Vanguard balanced 60/40 mutual fund (VBIAX). If history ended the week of March 9th 2009, these investors would have sidestepped some steep losses: SPY was down 55% from the top, and the balanced portfolio was down 36%. However, even with SPY down 18.50% and VBIAX down 16.04% YTD as of yesterday’s close, an investor who started putting money to work at the exact high in in October 2007 would be up 156.8% in the balanced portfolio, or 228.7% in SPY.

From the lows in March of 2009, the balanced portfolio is up 300.6%, and stocks are up 633.7%.

Maybe the investor who got out at the top had the good fortune to come back in later. More likely, they missed out on all or much of the subsequent upside, and seriously derailed their financial plans.

The Role of Proactive Management

Now, that is not to say there is no merit to attempting to reduce portfolio volatility when faced with the prospect of steep declines. And from a financial planning perspective, drawdowns like this can be quite harmful to someone making withdrawals deep into retirement. That is why we have a tactical overlay within our portfolios, and why our financial advisors proactively reach out to clients to prepare for life transitions and changes to circumstances that affect their financial plan.

Investment managers share some characteristics of pilots. While we are not trusted with your physical lives per se, we are trusted with the financial product of your life’s work. Our job is to safely get you to your destination, to build and preserve your wealth.

If you are young and contributing to your retirement savings every year, or you are more established and allocate a portion of your speculative growth capital to us, we can hop in the fighter jet and take you for a ride: high volatility, higher potential reward.

If you have income needs from your portfolio and are using it to supplement social security, you can be sure that we will be rigorous in our pre-flight checks, take the safest plane on the market, and avoid bad weather as much as we can.

Most of our clients are somewhere in between. What has been so difficult in 2022 thus far is even these investors are dealing with mid-teen percentage drawdowns. At -16.6% for the balanced benchmark, this would be one of the worst periods for a diversified, balanced portfolio in history.

The Big Decision

In this environment, it is extremely important to remain focused on what matters over the long term. Losses are never welcome, and what we have seen this year is especially uncomfortable because bonds have not provided a diversification benefit to stocks. As the headlines about recession, bear market, and inflation pick up, keep in mind markets do not always “follow the news.” This is especially true at turning points.

While diversified portfolios have experienced an exceptional amount of turbulence this year, we encourage you to keep in mind the long-term “safety” record and the dangers of interfering with your investment plan when things get bumpy. As we head into the back half of the year, keep your seatbelts fastened and trust your pilot to do their job.

Thank you for your trust and confidence.

David M. Borowsky

Chief Investment Officer


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