As I write this, the Dow happens to be down 1000 points around noon. What is an investor to do? At Harford Financial Group, we have tried to proactively communicate to our clients and public throughout 2022 as we have dealt with multiple situations that have negatively affected the markets. First, it was the threat that Omicron would cause backtrack of the economy and shutdowns. Then it was the effects of inflation that was estimated to be 7 to 8%. After that, Russia’s invasion of the Ukraine. Right now, as the Federal Reserve is raising interest rates to combat inflation, there is concern that it might cause recession. As a result, the stock and bond markets have been volatile. The reason, pure and simply, markets become volatile during periods of uncertainty. Markets crave more certainty. Since markets are made of humans, it is not surprising since at our core as people, we like more certainty. Here are some things to consider. Some may be new but some are repeat because it is important to have repetition sometime:
1. We wear many hats for our clients at Harford Financial Group. We are holistic financial planners providing guidance on taxes, estate planning, cash flow, retirement income, insurance, and investment. We provide financial advice on specific investment strategies. We are also counselors. Investing can be extremely hard emotionally. It is understandable when we see negative values on our statements, our minds can immediately go extremely negative and we may think “I am going to lose everything.” This is where we talk about difference between possibility versus probability. Everything is possible. We could get hit by an asteroid which is possible. However, most of us do not live in fear of that. For many of us as investors with extremely diversified portfolios with mutual funds, index funds, and exchange traded funds, one single fund may own between 50 to 2000 stocks. The probability that all those stocks are going to be worthless because the company goes bankrupt is extremely low. If a person owns the S&P 500 which is the top 500 companies in the United States, what are the chances that all companies like Coca-Cola, Home Depot, Ford, Wal-Mart, Apple, Amazon, and more are all going to go out of business?
2. Here is one of the main ironies that sometimes we all can forget. To make the returns that we traditionally make investing in stocks, which is 10-12% annually on average, because of the exact volatility that exists with stocks. Said in another way, the reason we all have not made much on the cash we have in the bank is because of the lack of volatility. We feel strongly that virtually everyone, even current retirees, need a certain percentage of stock because stocks are the best long-term hedge for inflation. We often ask a lot of our baby boomer clients what they paid for their first home. Often times it is somewhere between $20 to $50K. This is for a house. Now, one can’t buy a new vehicle for that lower amount. The long-term inflation rate is 3% which means the cost of living will double over 25 years. We usually say that a retiree should expect the cost of living to double over their retirement if they are going to have 20-35 year retirement.
3. To go with point 2, when we say long-term stocks give rates of return of 10-12%, the actual annual returns rarely are that exact number. The returns could be plus 30% one year and minus 10% on another. Returns on stocks are not a nice linear upward slope. The returns are more jagged and variable.
4. We have emphasized the bucket plan a lot lately and it is still timely. You want to think of your money in now, soon, and later. Now is what you need for the next year. Soon is two to 10 years and Later is 10 years in beyond. For the now and soon time period, it is mostly stocks and bonds whereas, stocks are usually for the bucket that is 10 years and beyond. For instance, looking at the bucket approach, the worst crisis or bear market during most of our lifetime was from November 2007 through March 2009, the S&P 500 dropped 57% from the high to the low during that time. A retiree who was drawing on their portfolio who had enough cash and bonds in their now and soon bucket would have been able to ride out that scenario. Within 4 years, the S&P was back to the 2007 level, then after that went up.
5. We wish we could tell folks that you will never have challenges and you could invest in an investment product that gave you great returns with no downside and low fees all of the time. The reality is there is no perfect investment that gives you all the upside and no downside. That is the reason we have to develop plans that are well diversified and use different investments that compliment one another. For a period we looked for investments called tactical investments that tried to do this. Unfortunately, we found that there was not one that could replicate performance under every scenario. Corrections and bear markets have patterns but no two are ever the same or caused by the same thing. We have found clients appreciate candor. Just like other aspects of life we are going to have ups and downs. There will be struggles and challenges but this too shall pass.
6. We like to use the example of the weather as great metaphor for the financial markets. The weather and financial markets are very complex with a lot of factors. No one or system can accurately predict with 100% accuracy what will happen all the time, it is too complex. That is why with respect to the weather, we do things to our homes to deal with cold, heat, rain, snow, etc. Our financial home is a lot like that, we have to weather proof it knowing it does not stop the rain, snow, and bad weather but we will make it through it.
7. Over long-term the stock market tends to have more positive days then negative. We have been showing an illustration recently that shows from 1952-2021 that the S&P 500 has been positive 51 out of 70 years or over 70%. During times like this, there is a tendency that it will never end. Reality is that it will end at some point..
8. Bear markets and corrections typically end when enough investors just give up and do what is called capitulation. Their thought is, this time is different and get me out before it goes lower. Typically, when folks sell at lows, they wait a long-time before they get back in when they feel the environment is “safe”. The challenge is that the time when most of us feel it is safe, the market has gone up and we have missed the recovery of that upside.
We hope this helps. We generally encourage clients to try to stick with their long-term financial plan. We always say that you are in charge and it is your money. As fiduciaries we will recommend things and at the end of the day, the investor is in charge. If you have any questions or would like to meet, please contact Melissa Anne and she will set up a meeting. Stick in there.