Investing Comes with Risk
Investing comes with risk. So far in 2022, we have had plenty of risk. Rather than saying April showers bring May flowers, for right now, let’s try out: April market drops bring higher expected returns.
The screaming media want us to believe the world is ending. It is not.
Of course, declines are not uncommon. In fact, they usually happen every single year.
According to history, declines of 10% or more happen about once a year. For the S&P 500, the average intra-year decline is around 15%. Here’s the silver lining: since 1926, the S&P 500 had 6 TIMES as many years with returns greater than 20% (36) than years with losses more than 20% (6). The good tend to last 7 years, and the bad times only 1 year.
Stock market flops are part of the price we pay for generating returns. It is a normal part of investing, and just because the market is bumpy does not mean you stop investing, or stop following your financial plan.
It is also why financial planning + investment management is a powerful combination. We may suggest sticking to the investment plan, but don’t take your eye off the ball. Investing comes with risk, but also opportunity.
Financial planning matches your investments to your goals
When we integrate planning with investments, then we have reasons for actions, and we can focus on taking responsible next steps.
If you’re just starting out, lower stock prices are great! It means you get the wonderful chance to buy more of the world’s greatest companies at lower prices. This too shall pass and when it does, you’ll be a bigger owner of the long-term growth of earnings power of the global market. Your plan is to accumulate, so just keep buying.
If you’re drawing income from your portfolio, then we’re planning for years of income. More recently, we’ve been calling this your war chest. Your war chest provides a stable source of funds for living needs, so we can avoid selling our stocks and other growth investments at a loss.
As long as the time horizon of your investments is matched to the timing of your cash flow needs, you can afford to be patient. What your plans states is often a direct result of where you are in life. Plans keep us grounded when markets go sideways.
A diversified portfolio doesn’t feel so diversified right now
Financial headlines are all screaming about inflation. Higher inflation is something to watch. Costs of good are growing at rates we haven’t seen in 40 years. This is also causing a material increase in interest rates.
Higher interest rates, mean lower bond prices. Lower bond prices mean a lot of traditionally diversified portfolios are hurting as bonds drop right along with stocks. A diversified portfolio of Stocks, Bonds, and Bills isn’t feeling so diversified at the moment.
Higher inflation and rising rates may feel concerning right now, but this too shall pass. What we’re seeing now is a drop in market pricing as rates rise. As the market normalizes, we’ll have much higher yields on our bonds and cash. Every coupon and interest payment received now can be reinvested into your bonds at higher rates. That’s good news for retirees on fixed income!
Investments are only part of your financial plan
We believe that having a financial plan for your retirement is critical. Volatility can be a good thing when we consider all the pieces, and the opportunity. We penned a post earlier this year on productive steps to take during volatility.
That’s right, volatility often means opportunity; it can just be hard to see at the time. Currently, we are checking for opportunity to rebalance portfolios into more tax efficient holdings. Or shift higher yielding investments from taxable accounts to tax advantaged accounts. We’re also unlocking unrealized capital gains with tax loss harvesting. And rebalancing!
We are also considering Roth Conversions. With balances down, and if cash is available, now can be a great time to accelerate conversions, so that when the rebound occurs, it is captured inside a tax-free account.
All told, your financial and retirement plans should pair with your investment plan. It’s a three-legged stool based on your assets, your taxes, and your risks. When investments are volatile, there is opportunity to coordinate all three and move to a better future financial position.
Wondering what you can do? Schedule a meeting and let’s take a look.
Adam K. Wright, CFA, CFP®