Time in the Market, not Timing the Market

As we continue in a time of uncertainty, it’s important to consider your personal, business, and retirement goals, and adjust as needed. How are your finances shaping up so far this year? Though 2022 has brought uncertainty for investors and taxpayers, there are strategies to consider for the remainder of the year. To learn more on this topic and the various strategies available to you, keep reading or watch this on-demand webinar.

Inflation and Alternative Assets

Currently, inflation is running at a 40 year high. We haven’t seen this kind of inflation since the early 1980s. It’s important to understand correlation and how different investments work together. Typically, as stocks go up, bonds are inverse and will go down. This doesn’t always happen because other situations such as a debt crisis or great recession, can cause both stocks and bonds to fall.

Though it’s hard to predict, you can use data from the past to make estimates on what the market could do as we face record-highs in inflation. For your portfolio to stay stagnant, you must grow your portfolios at around 7% to keep the same purchasing power as you had a year ago. Even if you stay the course, a typical bond fund can earn anywhere from 1-5%. Right now, 5% is almost unachievable since it requires taking incredible risks in your bond fund. Other options are available, though.

You can consider alternative asset classes for your portfolios to address the current instability in the market. Currently, it is predicted that bond funds will have a negative real return (meaning the rate of return you achieve minus inflation or the real amount that goes into your pocket). This doesn’t mean you should sell every bond fund you own and jump into stocks, though. Make sure to talk to your wealth consultant about your portfolio because some bond funds do respond well to high inflation.

Alternative assets can include:

  • Real estate investments – REITS (Real Estate Investment Trusts) can be very attractive but may also have long holding periods and can be risky.
  • Commodities – cattle, grains, hogs, etc.
  • Long/short strategies – also sometimes called hedge funds. You sell an investment or position in a company with a commitment to buy it back to play the market. This also comes with a large amount of risk.
  • International/emerging market debt
  • Precious metals – such as gold, silver or platinum.
  • Private equity – this is a privately owned business that is not listed on the public market. There are 85,000 privately owned businesses, and these companies often aren’t as impacted by changes in the stock market as those who are publicly traded.

Time in the Market, not Timing the Market

Though the stock market is unpredictable right now, there is a large cost to missing the best ten days in the market. The risk of missing the best ten days in the market outweighs the risk of “riding the wave” or sticking out the dips in the stock market. One study indicates that investors who stayed fully invested over the past fifteen years (December 31, 2016 – December 31, 2021), earned $24,753 more than investors who pulled out and missed the market’s ten best days. Looking at historical data since 1930, for investors who missed the S&P 500’s best 10 days each decade, their total return would be around 28%. In comparison, investors that rode through the stock market’s ups and downs would see a return of 17,715%.

If you sell off when the market is in a downturn, you may not be convinced it will fully recover and may be hesitant to buy back in when you see growth. However, you may wait until it would cost more to buy back into the market than what you earned by leaving the market. As long as you can manage your portfolio to the timing of your distributions, you shouldn’t worry about riding the wave. By managing the conservative piece of the portfolio, good diversification will try to outpace inflation in the long term.

The Importance of Rebalancing

It is recommended to rebalance your accounts annually, if not quarterly. There can be a dramatic change in what investment strategy works for you over the years, and if your portfolio becomes unbalanced it can be very difficult to rectify. Rebalancing is risk reduction, and without a rebalancing strategy, certain asset classes can grow beyond your comfort zone and risk tolerance.

Certain portfolios can be rebalanced easily, such as traditional IRAs, Roth IRAs and 401(k)s. Rebalances don’t cause a taxable event and can be rebalanced fairly easily. However, be careful when rebalancing non-qualified accounts such as trust accounts and joint accounts since they can cause taxable events. However, there are still strategies that can be used for these accounts, such as:

  • Tax loss harvesting – Sometimes, when an investment loses value, you can deduct that loss from capital gains due on other investments.
  • Avoiding wash sales – you cannot buy the same security within 30 days of triggering the tax loss harvesting rule.
  • Waiting on capital gains – be aware of the capital gains tax bracket.

It’s important as we head further into 2022 to look at your portfolio and ensure that you are comfortable with the risks being taken. Inflation can be concerning, but there are various strategies that can be used to minimize risk. For questions on your portfolio, contact your Adams Brown advisor today.

To learn more about the various strategies available to you, check out this on-demand webinar.