Category: Managing Investment Risks

By Jon Powell, CFP®

It’s no secret that things in our world are a bit uncertain these days. It feels like we’re constantly waiting for the other shoe to drop. Most of us dislike this level of uncertainty, but do you know what dislikes it even more? The market. 

Stocks have been plummeting lately, not helped by investors purging stocks out of recession fears. On May 19, the S&P 500 briefly dipped into bear market territory of a 20% loss from January’s high.⁽¹⁾

Even the big guns were not immune to a drop, with Amazon and Apple posting declines, among others.^(2,3) As a result, many economic leaders are predicting a recession in our near future.⁽⁴⁾

We can point our fingers at many factors as the cause of our recent nail biting, such as rampant inflation, the Fed’s solution of increasing interest rates, and international unrest, but the fact remains that we have no control over any of that. 

We’re here to help you take a deep breath and walk you through whatever our markets decide to do. Here’s how we are watching over your finances and taking proactive steps to help secure your wealth.

Big-Picture Planning

We don’t make investment decisions based on what everyone else is doing or what’s popular in the investment industry. Whenever we make planning decisions with you and offer investment recommendations, we do it with your goals at the forefront.

When the markets get shaky, we go the extra step of reviewing your objectives to make sure you’re still on track and make educated decisions that are not based on panic or emotion. 

This starts from the very beginning of our relationship with you. We use conservative return numbers when analyzing the potential outcomes of your plan because we know that corrections and bear markets will come again.

We also use asset allocation “buckets” that divide your wealth into short, intermediate, and long-term strategies to help you make the most of a volatile market. 

And in times like this, it’s even more important to have an emergency fund or a percentage of your portfolio that is either in cash or liquid enough if you need it for unexpected circumstances.

While cash investments may not provide a lot of growth, having a cash contingency fund with at least one year’s worth of living expenses will protect you against having to sell investments at low values to free up cash. 

We Know Your Risk Tolerance

Do you know that feeling in the pit of your stomach when you make a decision that was too risky for your comfort? Our goal is to help you avoid that feeling when it comes to your investments.

Before investing any of your money, we determine your risk tolerance, the amount of risk that an investor is comfortable taking or the degree of uncertainty that an investor can handle. Like most things in life, your risk tolerance may change with age, income, and financial goals.

We don’t want you to lose sleep at night, so we review your risk tolerance and how much risk you can afford to take and adjust your investments over time. 

We also watch over your money like a hawk, and when it’s time to get out of an investment because the risk is rising, we will contact you about adjusting your allocation.

Timing Matters

During bear markets, it’s important to remember that investors only realize losses when they sell, so it’s critical not to sell when the market is down. When you need to access your money is an important factor in avoiding those losses.

For example, if you are a decade or more away from retirement, you can likely wait out a recession or correction and benefit from the recovery. If you need access to your funds in the next five years or are within your first five years of retirement (frequently known as the “fragile decade”),⁽⁵⁾ a recession will make more of an impact on your money and your plans. 

From a practical perspective, we make sure your portfolio’s allocation is set up with your time horizon in mind. If you need money in the short term, your portfolio will hold safe investments like cash or short-term bonds.

Because retirement can last decades, you still want some of your money in investments that will produce long-term growth, but your portfolio will look very different from that of a 40-year-old in the peak of their working years. 

We Are Your Emotional Support System

One of the most important rules in investing is to refrain from making emotional decisions. It’s easy to get swept away emotionally when the market negatively wreaks havoc on your finances.

But if you stay true to your investment strategy and avoid making decisions when emotions are running high, you won’t run the risk of losing even more. 

Remember, bear markets have happened before and they will happen again. As long as you have created a disciplined financial plan and have a trusted advisor who is monitoring your money, you are doing your part to prepare.

If you don’t have someone you can turn to when the market gets wild, we’d love to support you and help you build your finances for a strong future. Reach out to us today at 301-670-0994 or by email.

“Every past decline looks like an opportunity; every future decline looks like a risk.”

-Morgan Housel

As we close the book on 2021, another year of generally excellent investment returns, we revisit the recurring anxiety of “what if this is the peak?”

It’s certainly not an uncommon feeling. Many investors may think a market high is a signal that stocks are overvalued or have reached a ceiling. However, they may be surprised to find that the average returns one, three, and five years after a new month-end market high are similar to the average returns over any one-, three-, or five-year period:

 

Source: Dimensional Fund Advisors, S&P 500 Index Returns 1916-2021.

Reaching a new high doesn’t mean the market is destined to retreat. Stocks are priced to deliver a positive expected return for investors, so reaching record highs regularly is the outcome one would expect. New highs are necessary for long-term investors to make money in the markets.

As such, it’s a good thing that markets have been constantly achieving new highs. Here’s the number of new all-time highs that were hit per year over the past decade:

Year	# of New Closing Record Highs
2012	0
2013	45
2014	53
2015	10
2016	18
2017	62
2018	19
2019	36
2020	33
2021	70

Source: Morningstar S&P 500, 1/1/2012 – 12/31/2021.

As I’m sure you’re aware, January has been anything but kind to investors, so far – seemingly refuting the evidence laid out above. But, we know when investing in financial markets that drawdowns are a possibility. Much like the regularity of new market highs above, we see regularity with market drawdowns, as well.A new all-time high isn’t a unique occurrence or uncharted territory – it’s kind of the norm.

Going back to 1950, we have seen a drawdown of at least 5% in nearly every year. Even declines of greater than 10% have been observed in most calendar years.

Magnitude of Decline	Frequency
5% or more	96% of years
10% or more	62% of years
20% or more	25% of years
30% or more	10% of years
40% or more	4% of years

Source: Morningstar S&P 500, 1/3/1950 – 12/31/2021

There’s a lot weighing on markets: Will inflation continue? Will the Federal Reserve tighten monetary policy, raising interest rates? Will new tax legislation ever happen? What about COVID? Climate change? China? Tensions around Russia and Ukraine? Cryptocurrencies? Meme stocks? SPACs?

I get it – It’s a lot. But, it’s always a lot. Remembering the Morgan Housel quote at the top: “Every past decline looks like an opportunity; every future decline looks like a risk.”

Less than two years ago, we were in the early days of the COVID-19 Pandemic. People were afraid to leave their house. We left packages by the front door for several days to “disinfect”. We stood around in socially-distanced circles with neighbours for “happy hour” on Friday evenings (I kind of miss that part of it, actually).

Anyway, the S&P 500 fell 34% in the span of a month. Since then, the index had gained 114% to the most recent high that was hit on January 3^rd1. Unintuitively, it turned out to be a marvelous investment opportunity, but it certainly didn’t feel that way in the moment.

The markets today may seem scary. The truth is the magnitude of a correction, when it will occur, and how long it will last is unknown. Have we already taken the first steps toward a depression?

Or will we be achieving new highs again in February or March? I can’t say. I’m pretty confident that however things play out, we will look back on this period with the same attitude of “well, that ended up being a good investment opportunity.”

We allocate the investment portfolios we build based on the capacity each individual client has to bear risk. Those portfolios are built with the expectation of declines. The financial plans are built with the expectation of declines.

The retirements we forecast are not an elaborate house of cards that fold as soon as the wind changes direction. If the anxiety and worry become too much to handle, then let’s explore what it really means for you.

¹ Source: Morningstar. Data from 2/19/2020 to 12/31/2021.

It’s been grizzly out there. Times like these give me a chance to share my absolute favorite quote about markets. From Bill Bernstein’s book, he recalls how investor Ralph Wagoner explained markets:

Last week, the Dow Jones Industrial Average (“The Dow”) cracked the 20,000 point mark. It’s fun and exciting, and it’s seemingly and indication that the stock markets and economy are doing well. Or at least that’s what financial media purports.

So, what does the Dow reaching this level actually mean? Well, in truth, very little. The Dow, as a benchmark, is an archaic, arbitrary bellwether of the US economy. The Dow is a bad index.

I’ve gotten a lot of questions concerning the concept of negative interest rates. Many seem to wonder how it’s possible for a bank to have a negative interest rate and why it would make sense for anyone to pay to give someone else their money.

Regulated interest rates are a confusing topic to begin with and uncharted situations, like negative rates, make it even more complicated.