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Your response to Volatility Matters Blog Post

Your response to Volatility Matters Blog Post

February 21, 2023

2022 was a HARD year for investments.  Most folks were met with envelopes or emails containing statements that were down far more times than up last year. It hurt your heart and it hurt ours – no one likes seeing balances decline! 2022 was an odd year where the best performing asset class for many people was cash.  Cash?  Yep, what is typically the worst place you can put money as it effectively loses money due to inflation was a great benefit in 2022.

This year will mark my 25th year in the financial services industry and with Harford Financial Group. I have been blessed to have be mentored by some awesome folks who had timelines in the industry far longer than mine. I have learned many things over the decades and want to share some of that in this blog post.

One of the things I have learned is something I hear over and over from the American Funds as I listen to their podcasts religiously, “Your most valuable asset is time”.  This is so true. It is true in life and it is true with investing.  If you have been a client of Harford Financial Group for a long time you have likely heard one or several advisors here use a phrase along the lines of: “it is not timing but time that is important when it comes to investing.”  If 2020 has taught us anything it is how true that phrase is.  In 2020, those money managers that tried to time the market moving in and out of stocks to try to be invested more when the market is moving in an upward trend and less when it is declining really got it wrong.  The market really misbehaved and federal and monetary policy moved swiftly causing market swings to occur rapidly so that the triggering mechanisms largely got it very wrong.  This correlated to investment balances declining more in the drawdown periods and rising less in the rebounding markets.

We are constantly trying to grow our expertise in the retirement income planning and tax management space. In March, much of our advisory team will be attending a 2-day event focused solely on retirement income planning strategies used by some of the best wealth managers in the country. It is from these folks that we have been able to grow our communication and portfolio management skills as they have taught us to use many visual aids like our buckets. 

We do feel strongly that each one of your dollars needs to have a job.  Some of those dollars have the job of just being there – an emergency fund, money you plan to spend in the next year – these dollars do belong in cash. The job of cash is to be there for you when you need it not to make money.

When I think of stock market volatility, I like to put it into perspective. Most of the stocks in a portfolio live in the later bucket – this is money folks do not plan to spend anytime soon.  It’s job is to grow, to provide an inflation hedge, to be there as a legacy for a surviving spouse or loved ones, for many people this is also part of their long term care plan should they need extended care.

Here at Harford Financial Group, we try to do our best during the distribution stage to take dollars from more stable assets in your soon bucket when stocks are in a correction or "bear market".  This helps you be a steady investor and not make the biggest mistake of selling stocks when they are down.  As a financial advisor and a fiduciary, it hurts my heart when folks sell stocks when they are down in many cases this makes the recovery take longer and can be detrimental to their retirement income plan.  The graphic below titled “Your response to volatility matters” looks at just this point.

This picture shows the experience of four different investors, looking back at another very hard year for investments – 2008.  In each scenario the investor starts with $10,000 and makes an investment into the stock market. Each investor saw their investment drop by almost 40% and their $10,000 go down to $6,151. 

For the Apprehensive Investor this was too much and they moved their investment to cash, where they stayed and so their balance did not go down any more but they also missed the opportunity for growth.  I see the apprehensive investor as frustrated and fearful. They saw their savings go from $10,000 to $6,151 or $100,000 to $61,510 or $1,000,000 to $615,100 and threw up their hands and took the volatility off the table. Clients I work with rarely do this but when they want to, I do my best to coach them in a different direction. I can count the times this has happened on my fingers (thankfully to date I only have ten fingers) but each time this happens I feel like I failed because I know we took away for a short period or a long period the opportunity for them to grow their wealth. This is the stuff that hurts my heart.

The story of the Uncertain Investor is a bit better but not as great as I’d like.  This investor basically said I want to take a time out and move out of stocks to cash and then go back in after one year.  So they saw their $10,000 go down to $6,151 and moved to cash and then after one year moved back into stocks.  They did recover but at a slower rate than I’d have liked.  In practice, I do see some folks take this approach (yes, I am still talking about those situations I can count on my fingers who it pains me to think about). What is different about what I see is that they do not use a calendar approach but a gut-approach.  When I feel better I will put this cash back into the market.  Sadly, that typically works out even worse than using the calendar approach!

I coach investors to be more like the steady Eddie. Be the Steady Investor.  They did nothing.  That can be difficult when they experience close to a 40% drop but these folks were able to hang on. They just stayed the course and stuck to the plan. My hope is by having cash at the bank and more conservative investments in the soon bucket that can help more people be the steady Eddie’s. 

Now, what is really exciting is that if you are able to buy stocks on sale you can be like the Opportunistic Investor and really grow your wealth.  The Opportunistic Investor did just that.  I remember Matt Rehak saying that “I have the one product no one wants to buy when it is on sale” and boy is that true when it comes to stocks.  But this is a great illustration of how going against the herd can surely help.  This is channeling your inner Warren Buffet. This Opportunistic Investor was probably considered crazy by some of their friends as they saw their $10,000 drop to $6,151 and though the news made it seem like the world was crashing around them, they decided to invest another $10,000.  You can see that buying low and taking advantage of those sales when they happen sure do help – they were able to grow their wealth to tremendous levels compared to the other three investors.  Most folks do not have the ability to double their invested amount but this is a great illustration of the power of hanging in there and taking advantage of opportunities in the markets when they arise.

Now, there are some things we do as an investment committee to help you remain the Steady Investor or position like the Opportunistic Investor. What I mean by this is that we are helping clients navigate through market volatility looking for ways to fund required distributions so we are not selling stock if possible, as well as, looking for rebalancing opportunities so that if our stocks are down and become out of the balance with the balanced, moderate or growth approach that you feel comfortable with in that later bucket we will rebalance and bring the stocks back to the appropriate level to match your goals. For some folks, means selling bonds and purchasing stocks.  This helps your portfolio over the long run and can position you between the Steady Investor and the Opportunistic Investor.