High inflation, worries about the Fed, slowing global growth, and the ongoing war in Ukraine have created extreme fear and volatility in the markets. The pullback in both stocks and bonds reflects a high level of negative sentiment and some stiff headwinds are already priced in.
Are we at or near a bottom? We don’t try to call bottoms or tops, and those articulate and well-dressed analysts on financial news networks don’t have crystal balls either. It is worth noting that Warren Buffett is back making newsworthy stock purchases over the past few weeks.
If Russia were to suddenly end its hostilities in Ukraine, a significant short-term headwind would be eliminated. Sadly, this best-case scenario, which would end the needless suffering in Ukraine, is highly unlikely. More realistically, investors want signs that inflation is not only peaking but on a downward path. Why? It would reduce the need for the Fed’s continuing steep rate hikes.
Powell and the Fed are hoping to slow inflation without tipping the economy into a recession. But they will need skill and some luck. For starters, the dollar is flexing its muscle on foreign exchanges and a strong dollar may reduce import price inflation. But the Fed will need more help from the supply chain, and new Covid lockdowns in China are exacerbating problems.
The 2022 market downturn has been a double-whammy as both the broad stock market indexes and bond market indexes are down by double-digits at the same time. Bonds have historically provided some cushion to portfolios when stocks are falling, but not this time as rising interest rates have pushed bond indexes down as well.
What to Do Now?
Successful investors are disciplined and have faith in the United States economy. They refuse to let excess optimism or pessimism override their rational thought process when heightened market volatility and sickening drops in market indexes create anxiety about the future.
Warren Buffet has famously and accurately called the stock market, “a device for transferring money from the impatient to the patient,” although it can be very difficult for most investors to sit by passively and watch their account balances continue to fall. This month, I highlight some positive actions you can consider to avoid making negative short-term decisions that may cause material harm to your long-term financial prospects.
1. Reevaluate Your Risk Preferences: How have you reacted to world events and the repeated market drops in 2022? If you are losing sleep and overwhelmed with worry, that may be a sign your appetite for risk and uncertainty has changed since your working years or when your portfolio was smaller. Having this realization does not mean that you should make drastic changes now, but rather incorporate this thoughtfully and in the context of your overall financial plan.
There are two very important factors to consider when evaluating the right amount of risk to take. First, what is comfortable? This can be determined using “risk tolerance” questionnaires whose scores match portfolios with specific risk and estimated average return parameters. Second, what kind of returns and liquidity does your financial plan require?
2. Rebalance Your Portfolios:While both stocks and bonds are generally down in 2022, there is significant disparity between growth and value stocks – growth is down more sharply than value. Systematically rebalancing is a great way to unemotionally “buy low” and “sell high” by returning your portfolios to their target allocations.
Perhaps you have been waiting for the right time to take more market risk or have cash that you have been meaning to invest. If so, the current market levels may provide the entry point you have been waiting for to make that cash work harder for you.
3. Raise Some Cash: If you feel the powerful urge to sell out of the market to stop the pain, consider taking a smaller step in that direction and create a cash buffer that is large enough to ease your concerns. Perhaps six months or a year or two of living expenses would provide that comfort, knowing that you would be able to be patient with the rest of your portfolio and weather the storm instead of moving your entire portfolio to cash and locking in the recent losses.
4. Sell for Tax Losses: If you have unrealized losses in your portfolio, now could be a good time to sell these positions and lock in the tax losses, which can be used to offset future gains.
5. Get Some Help: Having a comprehensive and up-to-date financial plan can provide the context, guardrails and confidence you need to feel comfortable with both your short-term and long-term prospects. Many financial advisors offer financial planning on a fee basis that is separate from investment management.
If you think you would benefit from a complimentary second opinion on your current investments and plans, please schedule our introductory two-meeting financial planning process at no charge to allow you to get to know us better and start to get organized and put together a plan of action. Go to go.oncehub.com/StewardshipColorado and schedule a virtual or face-to-face meeting to get started on your journey, or give us a call at 303.500.1931.
Material discussed is meant to provide general information and it is not to be construed as specific advice. Current and historical facts may not be indicative of future results. Keep in mind that rebalancing strategies may have tax consequences and transaction costs associated with them. Consult your tax and financial advisor regarding your personal situation.
Sean Wood is an Investment Advisor Representative offering Financial Planning, Investment Advisory and Insurance Services through Stewardship Advisory Group, LLC; an SEC Registered Investment Advisor. Securities offered through United Planners Financial Services, a Limited Partnership, Member FINRA, SIPC. Stewardship Advisory Group, LLC, Stewardship Colorado, LLC and United Planners Financial Services are not affiliated companies.