When life gives you market volatility; managing your investments in uncertain times

When Life Gives You… Market Volatility

Published on by Oana Travel (Great Escapetations)

Managing your investments in uncertain times

“The natural reaction when the market takes a dive is concern—even fear—and a desire to react. However, market volatility is a fact of life, and the anticipated recession risk remains moderate.2 Historically, the US stock market recovered from market dips over a long enough period and the S&P 500 shows a long-term uptrend.3

So, how do you best deal with market volatility?”

Market Health Check

Overall, 2022 has been a tough year for global investors. Stocks have been particularly volatile, with big price swings attributable to the potential for additional interest rate hikes by the US central bank and relatively high inflation.

The US economy has been sluggish, with a tight labor market, declining profit margins, and a flatter yield curve. US inflation rates rose from 1.23 percent in 2020 to 8.2 percent by September 2022, then receded to 7.7 percent by October 2022.1 High inflation rendered real-wage growth negative and hurt consumer confidence. The Fed interest rate hikes aimed at adjusting for inflation increased the cost of borrowing.

Of course, the natural reaction when the market takes a dive is concern—even fear—and a desire to react. However, market volatility is a fact of life, and the anticipated recession risk remains moderate.2 Historically, the US stock market recovered from market dips over a long enough period and the S&P 500 shows a long-term uptrend.3

So, how do you best deal with market volatility?

Keep calm and invest on

Most experts agree that even for those who monitor the markets constantly, the market remains unpredictable. That is why you should think long-term, take the emotion out of the equation, and invest consistently. If you sell or don’t participate, you will miss out on returns when the market picks up, so the sooner you invest and the longer you remain in the market, the better off you’ll be in the long run.

In addition, you need to diversify your portfolio. You should consider your goals and your tolerance to risk when choosing your mix, more than what the market is doing at the time or what it might do in the future.

Don’t overreact

“The first thing we tell our clients is not to be emotional about their financial decisions,” said Roger Kiger, Chief Manager and Investment Advisor Representative, Visionary Horizons Wealth Management. “Everything that we are going through right now is short-term. Never make long-term decisions based on today’s circumstances. If you make emotional decisions instead of logical ones, it’s going to cost you a lot of money.”

Brad Bower, President of Patriot Investments echoed the sentiment: “The biggest thing to remember during a market downturn is to not panic. Before you make any decisions regarding your finances, it makes sense to think about any long-term ramifications.”

Have a financial plan that fits you

“Regardless of the state of the economy, you should have a financial plan—and stick to it. Once you have a good plan in place, the market fluctuations won’t matter that much in the long run,” emphasized Kiger.

“We work with our clients to develop a personalized financial plan to handle the ups and downs of the market, and from there we can allocate investments based on a client’s goals and risks tolerance,” added Bower.

Note that the definition of risk is different for everyone and there is no one-size-fits-all plan.

Roth conversions

The money in your traditional IRA hasn’t been taxed yet. “If you convert a regular IRA to a Roth IRA right now when the balance is less, it’s that much less to pay in taxes to convert it to a Roth,” pointed Kiger.

“For retirees, the Roth conversions now could be an advantage because at age 72 they must begin taking an annual required minimum distribution, and they don’t know what the tax rate will be then. Now is a good time to take money from retirement accounts and put it into a tax-free account at low tax rates,” Kieger added.

A Roth IRA conversion can be a powerful tool for your retirement. If taxes are expected to rise after you begin withdrawing from your traditional IRA, then a Roth IRA conversion can save you money in taxes in the long run. However, you should consider some drawbacks: a potentially big tax bill could be tricky to calculate, especially if you have other retirement accounts funded with pretax dollars.4 Therefore, you must weigh the tax benefits of doing a conversion and it’s best to consult with a tax advisor about your specific situation.

Tax-loss harvesting

Tax-loss harvesting means to sell an investment that’s underperforming and losing money, then use that loss to reduce your future taxable capital gains. “We’ve done that for a lot of folks,” said Kieger, “especially for those who are in the higher tax brackets.”

Real Estate and Commodities

Generally, real assets—such as real estate, infrastructure, and commodities—have been good investments to hedge against inflation. Their high degree of inflation sensitivity has historically resulted in strong outperformance relative to bonds and equities.5

Commodities include raw materials and agricultural products like oil, gold, and grains. Commodity prices tend to rise alongside the prices of finished products made from those commodities in inflationary environments.6

Invest into certain stocks

When choosing stocks, find the assets with returns that outpace the rate of inflation. In a down economy, long-term investors might choose to buy stock in companies of interest that were previously inaccessible. If you see your stocks devalue but believe in the viability of the company/industry, you may eventually see the stock value increase again, and maybe even surpass its historical high.

When investing in a company, consider its profitability. Kieger pointed out that “it needs to be at least cash flow neutral; otherwise, they are still reliant on investors to stay in operation. If the company is not publicly traded, then I would probably wait because there are too many unknowns, and you would need to be prepared to invest a lot of money,” added Kieger.

“We are looking to buy stocks that have been punished unfairly: for example, technology stocks are down much more than the S&P 500 overall. Keep in mind that you should plan on keeping them for five to ten years. Buy something that’s down 30-40%, when the market is down 15-20%, and you come out ahead. For example, Amazon is one of those stocks because it’s down 45%,” said Kiger. “If you want safety, the dividend-paying stocks are good place to go,” he added.

Dividend-paying stocks tend to be in value sectors, such as financials, energy, and utilities, which have outpaced growth sectors, such as tech, where dividends are not the norm.7

“For those just starting out,” Bower specified, “an index fund that tracks the overall US stock market would be a great place to invest. Younger investors have a 30 to 40-year time horizon and they should focus on that rather than on today.” He also pointed out that “for younger investors, now is a great time to put cash to work in the market and to evaluate your personal savings rate. We encourage our clients to work towards a savings rate of 12-15% of income.” 

Invest into high interest paying bonds

“If you’re not a stock person, you can buy a 10-year bond that pays between 5-6 percent interest,” indicated Kieger. “We haven’t been able to buy bonds paying that much interest at low rates in the last 15 years, so there’s another good opportunity.”

Consider TIPS (Treasury Inflation Protected Securities)

TIPS are set up to protect you against inflation. Unlike other Treasury securities, where the principal is fixed, the principal of a TIPS can change over its term. Also, TIPS pay a fixed rate of interest every six months until they mature. Upon maturity, if the principal is higher than the original amount, you get the increased amount. If the principal is equal to or lower than the original amount, you get the original amount.8

“In my opinion, the prices on TIPS have already gone up. We bought TIPS in the last couple of years but stopped buying them in the first quarter of 2022,” cautioned Kieger.

Parting Words

“I’ve been in the financial advising business for a long time, and I have seen several market cycles like we see today,” said Kieger. In a good market, most anybody can manage their own money; however, in a bad market, there are few who know how to best proceed. “Lately, we’ve had a lot of request to discuss portfolios for people who have been self-managing for the last 15 years. Some of our younger clients haven’t seen a market like this. Others who have been through a recession figured out that they didn’t want to do this themselves. This has been our busiest time to help people stay on course and help them not make rash decisions based on short-term circumstances. I tell people that right now it’s more important not to make a mistake. That’s where a trained financial advisor can really help,” concluded Kieger.

Of course, you should always keep yourself informed. Be sure to look at several different sources of information and beyond the US economy. If you have a 401K, there is usually information on the provider’s website. Keep an eye on local investment companies’ websites for pertinent advice and workshops available to the public.

References

Disclaimer

This content is for research and information purposes only and does not constitute legally binding advice or recommendations. The author is not a financial advisor and does not endorse any product or service that is referenced or linked in the matter. This article is not a replacement for a financial advisor’s advice.

Article first published in Cityview Magazine (Jan/Feb 2023)

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