It has been over 12 years since the market and economy have faced significant challenges. During this time, investors have benefitted from increasing stock and bond markets and low interest rates. In response to the global financial crisis, interest rates were driven to near zero and the Fed embarked on a decade-long loosening of money known as quantitative easing.
Today, we find ourselves in quite a different scenario. Both stocks and bonds have had a terrible start to 2022. The fiscal and monetary stimulus of years past have now caught up to us and are aggravated by supply chain issues and global concerns. We live in a time of increasing inflation, increasing interest rates, and the Fed has begun quantitative tightening. A very different environment than we are used to.
If you have been reading my newsletters over the last few years, we have been warning of this outcome in the bond markets. Thus, we have moved money into FIA (Fixed Indexed Annuities) with principal protection guarantees built into contracts. Also, we have recommended income producing Real Estate and other alternatives over bonds. These alternative assets have performed very well recently, and we continue to evaluate other ideas that can add value during difficult markets. For stocks we have reduced traditional S&P 500 market exposure and redirected money into Private Equity (PE). Private Equity are stocks that are not traded on the volatile public stock markets. These moves have helped reduce the volatility, increase performance and added other layers of diversification. However, it has not eliminated volatility.
In 20 years of giving investment advice, I have found that the most beneficial traits for investors to exercise during prolonged difficult markets are discipline, patience, and indifference.
Discipline refers to sticking to your strategy. Investment strategies and portfolios are designed to handle the uncertainties of market movements. While market movements are mostly uncertain and unpredictable, we can be more certain in predicting that markets will have times of growth and other times of contraction, just like economies. Discipline is a virtue because it is difficult to do, especially in challenging times.
Patience is essential because negative news and outcomes may persist longer than we would like. Many investors can handle a period of negative outcomes. Few have the patience to outlast the trial. Both in the dot com crash of 2000 and the Global Financial Crisis, many investors threw in the towel after experiencing losses and negative news for over a year…and ultimately missed out on the recovery.
It can be fun to watch our portfolios increase in value during good times. But when the inevitable bear markets come, watching often can influence even the best investor to make unwise investment decisions. We only have so much willpower and self-control. We should cultivate an attitude of indifference to today’s market move and news. I like to think of this as “strategic ignorance.” We can’t be affected by those things we don’t know about.
You have a plan and investment strategy that has withstood numerous past bear markets and crises. No investment strategy is immune to temporary (Short Term) losses. The real question here is not what the market will do, but what you will do. Will you choose to exercise discipline, patience, and indifference? I certainly hope so. That will put us in a position to weather the storm and potentially invest in high quality companies on sale, which could ultimately reward you down the road.
I am here for you. I hope these words offer valuable perspective. Let me know how I can be of further help.