Investing Through Turbulent Times

March 2022

Russia has invaded Ukraine, oil is above $100 per barrel, the S&P 500 is down over 9%, and inflation has reached a 40-year high.  Headlines such as these can easily rattle the most steadfast investor.  After an extended period of mostly positive returns, it understandable that some market participants might be tempted to cash out and leave the volatility behind for a while.   That is usually not the best choice.  It requires investors to be right repeatedly about something that experts rarely get right at all – market timing.  So, what are the strategies that allow investors to remain faithful to their financial goals during turbulent times?

Doubt the forecast, trust the plan.  The accuracy of market forecasts is bit lower than an honest coin toss.  Go back to late 2019 and search for forecasts that mentioned global pandemic, a market crash, 10% unemployment, and a sharp recession followed by a bull market.  You won’t find one.  The best time to invest in 2020 was when the news was at its worst.  That is not unusual.  From the vantage point of hindsight, the best time to invest is often when the headlines are most discouraging.  Hindsight is not available to those planning and investing for the future. 

Most investors embark on their investment journey with a plan.  That plan includes financial objectives, and a time horizon.  It incorporates an understanding of the investor’s ability and willingness to accept risk in pursuit of their objectives.  When properly developed, the plan keeps the investor's priorities at the center of the planning process, not market forecasts or assumptions about tomorrow’s headlines.  Certainly, our priorities can change in time: marriage may happen, college tuition comes due, retirement becomes imminent, but inflection points can be incorporated into a good plan.  Most importantly, a good investment plan reflects the investor’s tolerance for risk.  When properly implemented through an asset allocation, the resulting portfolio incorporates a required level of defensive strategies to survive negative markets, as well as a sufficient level of risk to capitalize on growth opportunities.  In this way, a good plan anticipates both good news and bad without trying to predict the timing of either.  Reacting to unpredictable markets and headlines can sabotage the balanced elements of a good plan.

Diversification – the only free lunch.  The discipline of diversification helps investors avoid the risks associated with investment in a single firm, a single industry or even a single country.  It is not a panacea.  A diversified portfolio will always provide an overall return lower than its highest-returning asset, but higher than its worst-performing asset.  Over time, a diversified portfolio can produce superior risk-adjusted returns with greater consistency and frequently at an overall pace of growth that will support the investor’s objectives.  Volatility in markets often widens the disparity between winners and losers, thereby increasing the temptation to bet more heavily on assets that profit from bad news.  However, the next headline can reverse a trend and diversified portfolios have exposure to assets that do well in a wide variety of environments.

A sharp crisis can cause even diversified assets to converge on a negative return, however crises by their nature tend to be short-lived.   Like so many investment strategies, diversification needs time to deliver its benefits.

Cushion with cash.  Every investment plan should incorporate a cash reserve held outside of markets.  For most households, a reasonable cash reserve goal to aim for would equal six to twelve months’ worth of expenses.  The reserve should include amounts set aside for a known outlay scheduled to be made during the next twelve months such as a new car or the down payment on a house.  Having a proper cash reserve will help avoid a forced liquidation of securities during a time when prices are weak.  In this way, it plays an essential role in ensuring that a properly constructed investment portfolio can perform in the long run.  All well-constructed portfolios are based on allocations which incorporate assumptions about long-term returns, volatility, and correlations between asset classes.  In order to perform to expectations, they have to be in place long enough to deliver the intended results.  A cash reserve allows investment portfolios to have a “long run.”

Average in.  If you are committing new funds to an investment program or using investments as a long-term savings strategy, consider dollar cost averaging or committing a set amount at a set interval over time.  Such a strategy gives you more entry points and more opportunities to purchase assets at favorable prices.  It can average down costs over time by buying more shares when prices are low and fewer when they are high.  It also has the many of the advantages of discipline built into a simple process.  It can increase transaction costs where those are a part of the investment process, but it can also reduce the risk that investment at a single point in time may be followed by adverse markets. That effect is typically mitigated by the passage of time.  Negative investment returns on diversified portfolios occur more frequently in short time spans than over multi-year periods.

See beyond.  Rough markets don’t last forever, although it can seem that way when we are in them.  The first decade of this century included the aftermath of the bursting of the “dot-com” bubble and a global financial crisis.  We got through both.  On average stocks have delivered positive returns in seven of every ten years.  Those are pretty good odds.  Our parents and grandparents maintained careers, businesses, households, and got us through pretty tough times.  They experienced wars, depression, bull and bear markets, commodity shortages and a slew of recessions.  Most of them gained wisdom and resilience in the process.

It is human nature to work toward growth and progress by finding solutions to the challenges we face in ways that allow us to prosper.  We live in a society that doesn’t just permit such progress, it rewards it.  It has its share of imperfections - it’s just better than most of the alternatives. Our logistical and supply problems will be solved in time because there is a powerful economic incentive to do so.  The bullies of the world will eventually find the limits of power by subjugation.  We get through it, and some of our toughest challenges give rise to new waves of profitable innovation.

As always, if we can help you along your financial journey, please don’t hesitate to reach out to us.

This information is for informational purposes only and does not constitute investment advice.