Key Takeaways
When everything seems unsettled in the world, it’s important to go back to basics.
Focus on things you can control; not things you can’t control.
Trying to time the market or fleeing to perceived safety rarely works out in the long run.
When you’re watching helplessly as the atrocities of the Ukraine war play out on TV, it’s easy to feel like the world is going off the rails. Plus, COVID is still with us, and now you have the highest inflation we’ve seen in 40 years. With negative news dominating the headlines, it’s natural to want to make changes to your investment plan as your body’s fight or flight response kicks in.
At times like these, it’s important to go back to basics and focus on what you can control versus what you can’t control. Separating those two “buckets” of worry will help you from feeling overwhelmed.
What We Can’t Control
Let’s take the Federal Reserve and its decision to start hiking interest rates. None of us can control what the Fed is going to do any more than we can control what the Russian army is going to do. The Fed’s mandate is to keep inflation under control and to help ensure maximum employment. It’s not the Fed’s job to keep the stock market up or mortgage rates down.
What We Can Control We still have control over how much we allocate to large and small company stocks. We still have control over how much we allocate to U.S. stocks vs. non-U.S. stocks. We still have control over the structure of our bond investments. We’re already positioned very short-term with our bond investments relative to the overall bond market. That helps protect us in a rising interest rate environment because the bonds we own will mature faster and be reinvested sooner at the higher rates. For clients who have taxable accounts, if the market is dropping, it’s a good time for tax trading so that we reduce or eliminate the tax impact of future gains.
Market Timing While your natural fight or flight response can make you want to take your money out of the market during volatile times. But study after study shows that’s exactly the wrong reaction. For one thing, no one ever tells you when it’s safe to get back into the market and it’s almost impossible to recover from the upside you miss out on while sitting on the sidelines. Research shows time and time again that most individual investors are very poor market timers. Believing you can successfully time the market on a consistent basis, especially when things are this volatile, is a losing strategy and results in a degradation of returns.
Real-world Example Back in 2010, several new clients came to us after being burned twice by their poor timing decisions. First, they left the market for the “safety” of long-term Treasury bonds as the 2008-09 financial crisis pummeled stocks. The past 12-month performance of those bonds was up about 18% at that point, so it seemed like the smart thing to do. But as the stock market roared back to life in 2009, their bond investments plummeted. They were caught flat-footed. Meanwhile, our clients (who stuck with their investment plan throughout the crisis) had recovered all of their losses and then some.
A Better Approach
At Novi, we believe the most effective way to manage money for the long-term is to start by focusing on the basics of investing:
Your investment plan works in conjunction with your entire financial plan (cash flow needs, tax reduction, estate wishes, etc.).
When it comes to stocks, we believe market prices are the best estimate of value and the market incorporates ALL new information as soon as it is publicly available.
We pay close attention to the bond market and current conditions. Generally speaking, our bond allocation is short-term and of high quality. There’s just not much reward right now for investing in long-term bonds.
We use academic research to help determine long-term investment decisions. Example: overweighting to small and value stocks relative to the market because you expect to receive a higher return from these stocks over time.
Conclusion Even when things seem out of control, sometimes taking no action is the best course of action. Especially when it comes to your investments. We have faced similar hard times before. Remember the 1970s? There was turmoil from the Vietnam war, the oil embargo, higher gas prices, and inflation. The Fed had to take action to get prices back under control. We took some bitter medicine to lay the groundwork for a long period of prosperity. The Fed is much more experienced with monetary policy now and will take the steps needed to control inflation once again. We got through it then and we’ll get through it today. If you are looking for a professional advisor to help construct or review your plan, don’t hesitate to reach out. We have substantial experience in this area and are happy to help.
RYAN M. VOGEL, CFP® is the CHIEF PLANNING OFFICER, PARTNER at Novi Wealth Partners.