The stock market is going through a period of repricing. The following data is through 1/24/22:
As you’ve noticed, volatility in the equity markets has been rising recently and we hit a market correction (i.e., down 10% from recent high’s) yesterday. This turmoil began in February 2021 when many speculative growth stocks peaked and is now just starting to affect the blue-chip companies you are familiar with.
In a nutshell, this has just about everything to do with inflation, interest rates, and the Federal Reserve. Inflation affects interest rates and interest rates should be viewed as the price of money. When the price of money is low, the Federal Reserve makes safe haven assets like bonds and cash very unattractive to own. This in turn pushes money into higher returning assets (growth stocks, venture capital, and crypto) that most investors wouldn’t typically own without proper education.
So, with no certainty about the path of inflation or interest rates, investors are re-thinking the types of assets they want to own and what price they are willing to pay for them. We are expecting this push and pull in the equity markets to continue for a period of time.
Nobody with an investment portfolio enjoys these periods of time, including your investment advisor. We are invested right alongside you, sharing in the rewards of compounding returns measured over many years.
Although we have not received many concerned phone calls over the past few weeks, we do want you to know that we are not being complacent and are available. It is certainly okay to feel some emotion due to this market volatility, but our goal is to ensure it doesn’t consume you or derail your long-term plan. Again, this is not out of the norm with respect to periodic market volatility. Most importantly, this too shall pass.
We are often asked during market downturns what we are doing about it. The best answer to that question lies in what we have already done.
1) Prudent assessment of the investments you own:
Within your investment portfolio you own companies that have earnings and cash flow. Much like in your personal life, cash flow from operations will allow companies to withstand and absorb market shocks like we are experiencing. They may trade down, but generally speaking, they hold their ground better than companies without earnings.
2) Encouraged the development of a financial plan:
A financial plan allows us to assess your risk tolerance and risk capacity. For those of you that have gone through our process, you may recall the Bad Timing and Monte Carlo simulations we utilize to dial in both asset allocation (stocks to bonds mix) and strategy used. The framework of a financial plan is designed to allow you to keep a longer-term view on the equity markets, endure market downturns and thus fully realize the benefits of owning stocks.
3) Systematically reviewed and rebalanced your accounts:
During our quarterly review process, we formally review your account(s) and consistently look to pull the weeds and plant flowers. It can be hard to sell stocks and rebalance into bonds when the market is moving higher. Conversely, it can be hard to sell bonds and buy stocks when the equity markets are moving lower. That is all part of our process which ultimately benefits you.
Digging even deeper, our Research Committee meets frequently to discuss individual companies and funds. This approach identifies companies we feel have competitive advantage and solid earnings and opportunities that give us confidence to introduce them to client accounts. Conversely, we are assessing existing companies that you own to ensure they maintain a competitive advantage in the marketplace and have opportunities for continued growth. If they don’t, or we think there is a better alternative, we are not afraid to cut ties and move on.
4) Framing your investment assets in terms of buckets:
- Cash on hand should equate to 6-12 months of living expenses plus any known large expenses coming in the next 3-6 months. Beyond that, it is our recommendation that your monies should be working harder for you…either in your investment portfolio, by reducing debt, or by other investment vehicles you have access to.
- Bonds can be the rudder to the ship during market downturns and can offer some piece of mind. That said, it is unlikely they will outperform stocks over the long term. Not all situations are the same, but for those of you that are retired, or embarking upon retirement, you might think about your bond exposure in terms of being 5-7 years of distributions (to fund living expenses). Taking distributions from bonds during market downturns, allows equities to recover. The determination of where your distributions is ultimately our job, however, this framing can help you to stay the course.
- Historically speaking, equities have been positive 91% of all five-year periods of time, 96% of all 10-year periods, and 100% of all 20-year periods. In fact, the WORST 20-year timeframe in stock market history, investors still realized a 6% annualized return. This ties back to the amount of bonds that a client can own to give them peace of mind to “ride out” equity downturns. If you are 10 years or more away from retirement, your job is steady and you have good margin in your financial life, we think owning all equities (even through the downturns) is your best path. Stocks > Bonds > Cash over the longer term.
Call or email if you would like to have more conversation; that’s what we are here for. Thank you for being our clients.
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Pittenger & Anderson, Inc. does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Additionally, the information presented here is not intended to be a recommendation to buy or sell any specific security. To learn more about our firm and investment approach, check out our Form ADV.
