Focus On Your Goals
The most significant challenge recently has been to help clients understand that the investment landscape has changed significantly in 2022. For nearly 15 years, going back to the 2008 housing crisis, investors were comforted with the fact that the Federal Reserve was on their side and if the stock or bond market got uncomfortable, the FED would come to the rescue. That has all changed.
While not explicitly being hostile to investors, the FED is now on a course of reducing inflation at any cost. The primary tool that the FED uses to influence inflation is interest rates. When they want higher inflation, they lower rates, just as they did throughout the last decade. Now the tide has turned, and they are confronted with inflation that is at 40-year highs, and they need to get it down to their target of roughly 2 percent. As a result, they are now in a rate hiking cycle.
Is the FED Friend or Foe?
The consequence of this new direction in policy is profound and cannot be overstated. As an example, in 2022, the “safe” portion of an investor’s portfolio, the fixed-income part, is experiencing the worst performance in history. While stock investors have experienced losses and that’s never a good thing, the performance thus far isn’t surprising and could get a lot worse if the FED continues on a path of raising rates longer than Wall Street is anticipating.
What to do now? Whether you are a young investor planning for the future or a retired investor receiving income from a portfolio, the advice is the same. On the Stock side, you should be looking to invest in quality companies that have good balance sheets and don’t need to borrow money. The best types of companies to invest in this environment are companies that have inelastic demand for their products. Stocks to avoid are companies that have leveraged balance sheets (lets of debt) or companies that produce products or services that people don’t need but merely want.
Unusual Bond and Rate Activity
On the Fixed Income portion of the portfolio, if you are buying individual bonds, you stick with the tried and true strategy of building a bond ladder. The only difference between this environment and the last few years is that you should extend the out years of the ladder to capture the higher rates for longer terms than those recently available.
If you are buying fixed-income ETFs or Mutual funds, you would want to focus on shorter-duration vehicles to try and minimize interest rate risk. Under no circumstance would I recommend going into inflation-protected vehicles. It is important to realize the pricing of those is dependent upon future inflation EXPECTATIONS, not the actual inflation rate, and I can’t imagine a time when expectations for future inflation are higher than it is now.
Remember, the market doesn’t know what you own, and the investments you do own don’t care if you check their price once a year or once an hour. Stick with Quality, avoid the hype, and know what you own and why you own it. This too shall pass.
Fiduciary Wealth Management
Miami / Kendal, FL 33173