Most people invested in the markets experienced the pain of bad returns, with the average 60/40 portfolio declining by 17% in 2022. If 2022 were any other year, it would be easy to chalk this up to market volatility, but in our view investors are likely not yet out of the woods.
It may be time to talk to your financial advisor about switching strategies to reduce further losses. But what kind of investments suit this new landscape, and what are some vital signs that it might be time to consider switching up your positions, your strategy, or even your advisor?
After more than a decade of easy money, the investment regime has changed. In the 2009-21 period, market drops were nearly always buying opportunities because the underlying policy of central banks was one of providing liquidity to ease financial conditions and support the market. Inflation was low, and there were few consequences to flooding the market with liquidity. All this cash acted as a de facto support for financial markets.
However, beginning in 2022, this is no longer the case. Inflation has shot up, and many factors suggest it will remain persistent in the coming decade, meaning we can expect inflation to remain high. As a result, central banks can no longer keep flooding the market with money and expect inflation to remain low. This change in inflation expectations has had (and will continue to have) significant implications for markets.
Beginning in early 2022, headline inflation (the price of all goods and services) and core inflation (which excludes food and energy) were significantly above target in most advanced economies and several emerging markets. According to standard economic theory, inflation is likely to get out of control under a prolonged mix of loose monetary and fiscal policies. And the outcome — whether good or bad — typically depends on economic factors as well as the reactions of central banks.
Although most central banks want to fight inflation, most options available to them risk plunging the global economy into recession. All this to say, there has never been a more crucial time for investors to speak to their financial advisors to guide them through the options available in this challenging macroeconomic landscape.
But first, let’s talk investments. Before you meet with or hire a financial advisor, you should know which investments in your portfolio need the most attention.
Where’s the Risk?
It may seem counterintuitive but, in our view, the most at-risk investments may be those that have traditionally performed the best over the past decade, particularly high-growth tech stocks, which benefited the most from low interest rates and excess monetary liquidity.
After significant share price increases during the pandemic, many tech stocks are suffering deep losses. Without exceedingly low interest rates, tech stocks are struggling, conjuring up images of a slow-motion crash akin to the bursting of the dot-com bubble during the early 2000s.
In general, we believe U.S. stocks are currently overvalued, and the likelihood of a looming recession increases the chances of seeing a prolonged and potentially deep bear market. Furthermore, with the Fed signaling its intention to continue to raise rates and keep them high, junk-rated corporate bonds may be risky, too.
Now let’s talk investment strategies and advisors. When do you get a new advisor, and how do you know you have a good one?
- If your advisor is still employing the same strategies (growth, technology, etc.) they used over the last decade.
- If your advisor brings in assets only to farm out the investment work to fund managers.
- If your investment portfolio is full of passively managed index funds and index ETFs.
- If your advisor can’t articulate a clear strategic investment plan for navigating the current environment.
- If your portfolio performed in line with the markets or worse than the markets in 2022 and your advisor has yet to make significant adjustments.
- If you don’t trust your advisor to protect your assets prudently.
If you’re faced with any of the above, it may be time to find a new financial advisor. With the markets in flux and so much uncertainty on the horizon, you need an adaptable advisor who can help you navigate these challenging times.
What to Look For
Look for a financial advisor who is more than just an “asset-gatherer” and more of a portfolio manager. Your financial advisor should be able to help you identify the structural changes in markets and develop new strategies for guiding your money into and through a new market regime.
They should know that the investments and strategies that worked over the past decade are unlikely to work now. Their role is to shepherd your assets in the midst of a new investing paradigm — to protect capital from permanent losses and then generate and leverage opportunities that can grow your wealth.
It is clear that the markets are changing for the worse. But not all hope is lost. With the right financial advisor, you will be well on your way to making wise financial decisions and seeing those returns in time.