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HFG Bear Market Update

HFG Bear Market Update

October 13, 2022

We have received a number of phone calls as some of our clients have opened up and read their monthly or quarterly statements. As you read this some of you have not looked at those statements. There is ample research that we have seen that says in times of bear markets that psychologically it is okay to not look at statements because seeing the losses off of previous highs can cause investors to make emotional decisions based on fear and pain and that long-term they could regret. This is where we tell folks that one has to know themselves.

Two main points which we have emphasized this year: (1) Long-term investing can be emotionally hard at times and run counterintuitive to our psychological make-up (2) It is okay that you run the gamut of emotions. With that being said, we design financial plans knowing that bear markets will come. On average they come every 5 years. We never know exactly when they will come, what will be the exact cause, how long it will last and how severe it will be. It is very much like the weather and extreme storms. For many of our retirees who just wish they did not happen or expect us to completely buffer them from downturns, we just feel it is unrealistic over a retirement of twenty to thirty years. Unless you have enough guaranteed income in the form of pensions and Social Security (your floor) that completely covers your cash flow needs, investments like cash, cash value life insurance, or annuities that provide guaranteed principal protection most likely will not give you the long-term returns to maintain your purchasing power over that time.

This is why we believe in multiple strategies like potentially raising your floor by creating private pension-like income or the bucket approach of segmenting your money in now, soon and later buckets. Essentially my message is try to stick to your long-term plan. If absolutely necessary that you need to make changes emotionally, I would say tweak instead of blowing up your plan. 

Our investment committee is constantly monitoring the situation. Right now, the key theme that is still driving all the volatility in the market now and since the beginning of the year is inflation and with the Federal Reserve raising interest rates to combat that inflation has it caused us to go into recession or will it cause us to go into recession? That is the environment in a nutshell. As I write this, major companies are getting ready to report their quarterly earnings and many feel this will be ugly. Now the key thing to remember is that is that anticipation already priced into the market or will the market be shocked and go lower. Additional headwinds that are compounding the situation is the U.S. dollar has been particularly strong compared to other currencies (As challenged as we are here in US, other places in world are even more challenged). That sounds like a good thing but the negative side is that it negatively affects U.S. companies that are global because as they export they are less attractive at higher prices or as they bring back revenue from other companies the exchange is less advantageous to them. 

For many of the clients I work directly with, you have heard the analogy that I have used from Nick Murray. He looks at the challenge between inflation and recessions with the analogy of cancer and chemotherapy. Both are not options one wants to choose. However, if one has to make decision of letting cancer go unchecked or treated compared to doing chemotherapy, chemo can be the less bad option. Inflation in other terms is price instability. If you go to the store to buy the things you want to buy and there is constant long-term price instability, you cannot budget. Severe inflation has ravaged the U.S. at other points of time like the late 70’s and early 80’s and even worse in other countries with hyper-inflation. Many say that the hyper-inflation of the 1920’s in Germany, directly led to Adolph Hitler and the Nazi’s. Jay Powell, the current chairman of the Federal Reserve has said, promoting price stability, i.e. fighting inflation is his #1 priority. 

As we meet with our partners, no one knows for sure how long the high inflation that we are experiencing in the 8-9% range will last. There are signs that it is starting to fall but it is nowhere near where the Federal Reserve wants it to be to declare victory and stop raising rates. How long will this persist? Is it 6 months, a year, two years? There is no consensus.

You are probably saying to yourself, sheesh Adam, aren’t you Doctor Doom? Thanks for sharing all the bad news. Two of our values are long-term values are trust and long-term relationships. Our job is not to always tell you what you want to hear but what you have to hear. Many of you know by nature, I am a glass half full person. However, my professional training operating nuclear power plants and chemical weapons disposal plants plus sixteen years in the investment world, have made me have a mindset to stare bad news in the face, not panic, and handle it with grace under pressure. 

You hire us to be awake at the wheel for your investments. We take that responsibility seriously. It is ugly and may continue to be ugly. Unless you have the mindset that we are permanently screwed (and even then I am not sure if we are moving to what you think is safe would be the best strategy), we recommend sticking with the long-term plan. Remember, I am a long-term investor like you and feel your pain. As always, we are always here, please reach out to Melissa Anne if you need to set up a meeting with one of us for reassurance or you feel absolutely imperative to make changes. At the end of the day, it is always your money and we respect that.