Taking the Long View with Your Investments
/By Shelley Murasko
“Nothing in life worth doing is easy.”
My husband uses this line with our kids — a lot. In fact, he often makes them repeat it back to him.
It’s a slight rephrasing of a longer quote from former President Teddy Roosevelt: “Nothing in this world is worth having or worth doing unless it means effort, pain, difficulty…I have never in my life envied a human being who led an easy life.”
While sometimes I think this idea of “mandatory hardship to get rewards” is a little harsh, it applies to many situations. Parenting. Starting a company. Running a marathon. Losing weight. Learning math. You name it. The more pain, often, the more gain.
The same goes for investing. To capture the expected return, investors must endure difficult periods of volatility and intense emotions caused by a fluctuating market.
And what a difficult period we’ve had this year! 2022 has been one heck of a whiplash for investors.
It was a different story from 2019 to 2021, when investors enjoyed the ride of double digit returns in stocks. Coming into 2022, most investment portfolios were performing well above expected returns. All this growth in stocks happened despite the pandemic bearing down on the global economy.
In today’s market, stocks are now down by 18% and bonds by 6%!
So what’s going on? The answer is that no one knows for sure.
The Feds Rush to Stop the Party
Based on the timing of market movements, such as the 10% initial correction we saw in January, the biggest driver of portfolio declines impacting both stocks and bonds seems to be the Federal Reserve’s strong push to rein in inflation by taking money out of the economy.
What steps has the government taken to drain the punch bowl of abundant money it poured into the economy over the past couple of years? For starters, it raised the federal fund’s interest rate at a historically rapid rate — up 0.75% in just a few months. It also began pursuing quantitative tightening, a cycle where bonds are selling to the tune of $95 billion per month.
This constriction of money within the economy is certainly concerning. However, the driver for such action is the fact that we currently have a very strong economy across most measures: low unemployment, high cash reserves, ample corporate profits, manageable consumer debt levels, and relatively low interest rates, to name a few. Of course, this doesn’t take away the worry that the Fed could lead us into a recession if it accelerates money tightening too rapidly.
Global Conflict
Along with the worries about the Fed’s actions, we now have a war in Ukraine that persists with no end in sight. While the world is working to address the Russian-Ukrainian conflict across many fronts, global supply chains have frayed, oil supply has been threatened, and people around the world are facing higher prices on numerous goods and services.
Insurmountable Obstacles?
While we have plenty to worry about between Fed actions and world conflict, there are other issues that could play a role in upending recent stock gains. These include a heavy debt load in developing countries, stress in commodity markets, lingering effects of the COVID-19 virus, China’s slowing economy, climate change concerns, and fears of chaotic elections.
We live in a precarious world. Fretting over investment losses has been a fixture of markets over hundreds of years. The financial crisis of 2007 is still in our rearview mirror and many worry that a period like that could come again.
When subprime mortgages sparked a global crisis in September 2007, it sent the MSCI U.S. Broad Market Index into a downward spiral that led to the market crash of 2008. Since then, that same stock market index has soared more than 300%! While capturing the rewards offered during that time took discipline, courage, and a commitment to a long-term strategy, investors who stayed the course were rewarded with significant returns.
What Should You Do?
First, remember that the world has faced obstacles before. Whether it be wars, poverty, assassinations, or debt, capital markets have eventually carried on.
Also, remember that investors who stayed the course were ultimately rewarded with the expected market returns. Sometimes it took years to get back on track, but those who stuck it out and endured the pain achieved the gains they were pursuing.
There is no perfect investment recipe. A degree of volatility is a part of investing, whether you’re in a conservative or aggressive portfolio. As you look at your finances, make sure your investing strategy still works for your own personal timeline, risk tolerance, and income objectives.
Markets will always be unpredictable, and sometimes volatile, for long periods. We’re in such a time now. Rather than running for cover by selling your holdings when things aren’t looking so good, re-examine your portfolio to see that you’re still holding high-quality positions for the long haul.
Also, ponder ways to take advantage of this down cycle by considering the following actions:
· Add money to your investments if you have excess cash on the sidelines.
· Consider investing some of your cash reserves in I-bonds, which track inflation, and are currently offering attractive returns.
· Expedite your annual Roth conversion where you can now convert on depressed values.
· Harvest tax losses from your taxable portfolios.
· Sell off low-quality funds or stocks that were held for tax gain-avoidance purposes.
By acting on the things you can control, worries and negative feelings may lessen.
Lastly, find ways to mitigate the pain. Perhaps looking at statements or listening to money talk shows less often will give you more stamina for these volatile times. Enjoying other aspects of life may also defuse investment stress.
While the workings of the markets are sometimes painful and somewhat of a mystery, for those who stay in the game and take the long view, things tend to work out.
Whether it’s my husband’s input or Teddy Roosevelt’s, there’s something to be said about embracing the idea that many of the best things in life take patience, courage, and endurance. Sensible investing is one of those things.
Remember we’re here to help! If you need some input or guidance to pull you back from the cliff, don’t hesitate to give us a call.
