How Are You Handling The Economic Downturn?

Frye Financial |

A client wrote to me last week that he was distressed by the drop in value of his stock portfolio, and to please provide some good advice as to how to navigate moving forward. He then went on to write that he doesn’t want to hear that he should be patient and stay the course, and that his portfolio will bounce back in the longer term. He didn’t want to hear that financial markets are highly irrational, volatile, and unpredictable in the short term, but more rational and predictable in the long-term. He made it clear that he wanted to hear something different from me this time.

My first thought was, “I get it.” He’s frustrated, you’re frustrated, and I certainly don’t like seeing my clients’ portfolios drop so dramatically in value. Indeed, as of this writing the S&P 500 is down over 20% for the year, and the Barclays Aggregate Bond Index has dropped significantly as well. There have been few good options while the Fed currently is in the middle of their interest rate-raising cycle that is intended to slow the growth of the economy and combat inflation.

What, then, do I tell him? Do I ignore my forty-five years of experience that has taken me through these kinds of downturns many times, and advise him, against my better judgement, to sell the stock of his good solid companies? Do I ignore my experience in knowing that it’s next to impossible to time the markets, that when markets move back up after a big drop they often move in lightning-like fashion, and that those who sold often never make up for missing key upturn days? Do I ignore the fact that the current downturn in stock prices is an “intentional market take down” by the Fed to slow things down in the economy, and that eventually they will have to reverse course; that the Fed has "giveth and now has taketh" but will have to "giveth" again once their work is done? Do I ignore the fact that energy prices are coming down, commodity prices are falling, rents have begun to drop, and housing prices have begun to fall? In other words, that I see that the current Fed policies are beginning to be effective and that the end of the interest rising cycle is on the horizon? Most investors are aware that market corrections and bear markets are normal parts of the market cycle and extreme volatility whether on the downside or upside is part and parcel of participating in the financial markets. In fact, if the markets carried no volatility risk, the historic and future investment returns would be closer to what you earn in a bank savings account. But being aware of the aforementioned is of little help to some experiencing this downturn.

And speaking of bank accounts and interest rates, let’s segue for a second into what’s happening in the Bond markets. While I am writing this piece the fully guaranteed one- and 2-year U.S. Treasury bonds are currently paying around 4% in interest. Just months ago, the rates were less than 1%. Therefore, if you have cash sitting in bank deposit accounts earning little in interest, you should consider the Treasury bond alternative as a smart tactical move. And of course, if you have large amounts of cash sitting around and you believe, like me, that the financial markets will eventually recover, you should slowly be deploying a portion of the cash not only to U.S. Treasuries but to buy the equity market dips. Yes, I am fully aware buying the dips doesn’t seem very profitable when the markets are dropping daily. However, history tells us…(you know the rest).

Now let’s return to my client who wanted to hear something new and different from me to help navigate him through the current market meltdown. I could sell off a bit of his more aggressive equity positions and replace them with some more conservative equity positions along with some U.S. Treasuries.

Is it the right move in the short-term? The answer is yes, if it allows him to sleep better and focus on other important aspects of his life. But will it be the right move in the long-term? The answer is that while it will likely reduce his returns somewhat when the markets eventually recover, depending on when he gets back in, it may or may not reduce his returns enough to really matter and/or affect his retirement.

You see, managing money and our clients’ retirements is much more than just focusing on investment returns. We care about our clients and their human and vulnerable sides, and we try to listen to their concerns, hopes, and dreams. While I am very confident that your portfolios will eventually recover, I do want to know how you are doing and feeling during these difficult times. We want to help you make the right decisions for your unique set of circumstances. Your hopes and dreams are always front of mind and guide us as we continue to deploy suitable investment investing principles. In my view, the current market drop and possible looming recession are just parts of the sometimes-bumpy ride along the road to achieving those important financial and lifetime goals

So, hang in there folks, and let me know how you're doing.




This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. The Bloomberg Barclays U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.

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