Webinar Offers Investor Insight and Strategies to Overcome a Downturn

Pullbacks in the market are normal. One need only look at historical charts of stock market performance to see that market corrections occur regularly; some are more noticeable than others, some can be traced back to specific external events and some cannot.

Since 2020, investors have had one uncertainty after another. Now, amid ongoing supply chain issues, rising interest rates, inflation and the war in Ukraine, there seem to be more questions than answers.

During a recent webinar, investors tuned in to learn about how the right approach and partnership can avoid a crisis when the financial markets inevitably experience a reset.

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Financial Health: Where Are We Today?

As we digest the current financial downturn, where are we? For the first time in two years, COVID-19 is not the most pressing issue in most of our lives. Instead, we’re now dealing with inflation.

The erosion of buying power is significantly affecting everyone, and there’s nowhere to hide at this point. Diminished purchasing power stemming from increased costs is an issue we’ll all face throughout the rest of the year and maybe even longer. We can likely expect inflation in the range of eight or more percent in this calendar year.

High inflation is ultimately a supply and demand issue. And while consumer buying power is still strong, we are paying more for what we’re buying. This is clear in food, energy and automobile costs, for example. Vehicles are a unique space right now because of chip shortages. In fact, some Adams Brown clients that operate in the automotive industry have said anecdotally that if you do not have to buy a vehicle in the next 18 months, consider waiting. Automotive manufacturers have found unique solutions to letting new vehicles sit in parking lots; they’re delivering vehicles brand new without some of the chips in non-essential functions, like rear air conditioning.

Inflation is also affecting the housing market due to lack of supply. The rise in interest rates for 30-year mortgages is only moderately affecting new home purchases. Ultimately, buyers right now have little to no leverage. Gone are the days where buyers could negotiate for 10 percent off a home purchase and add a warranty and seller’s assist. In today’s market, homes are selling higher than asking price with appraisal guarantees built in.

That will change eventually, but as consumers are still buying, the market will continue to be uneven.

A big part of the inflation conversation is about the Federal Reserve and its ability to set interest rates. The Fed does have some tools to try to temper inflation, like stopping their bond buying program. That’s already been done, so it’ll be interesting to see the impact on the federal balance sheet and fixed income market. Another tool the Fed can use is increasing the interest rates, which has already started as well. It remains to be seen how often rates will increase and to what extent. It seems likely that rates may increase several times in 2022.

Many Americans are also looking to the war in Ukraine and wondering how that will affect the American and global economies. It’s reasonable to expect more missile testing from North Korea and an increase in cyber threats around the world. What’s unclear at this point is the effect of Western sanctions on Russia.

Energy pricing and availability is another area of concern. Long-term, the goal is to decrease global oil and gas imports. To that end, looking at where the U.S. can increase its domestic supply will be a point of interest.

In an Uncertain Market, Focus on What Can Be Controlled

Of all these moving parts, individual investors cannot control or influence any of them. And yet, investors are at the mercy of the global economy when it comes to their portfolio values. Instead, investors need to look at what they can control.

  1. Evaluating what assets perform well in a rising rate environment. It seems likely that the marketplace will be in a rising rate environment for a while. One asset class that does extremely well in this environment is large U.S. dividend-paying stocks or blue-chip companies like Coca Cola, Visa and Boeing. Commodities and hard assets are two other asset classes that historically perform well in a rising rate environment. Alternative assets, like private equity or real estate investment trusts (REITs) are another consideration. Not every investor will qualify for these, but those who do could stand to benefit from a more diversified portfolio.
  1. Looking at strategic overweighting and underweighting in the market. In this scenario, it’s not about market timing; rather, making strategic moves in the short-term to take advantage of what’s going on in the world today. For example, an investor might overweight stocks over bonds, U.S. over international, or large companies over small ones right now. Then, when bonds are lower, that might be a good time to roll back into international securities and small to mid-cap stocks.
  1. Increasing exposure in certain high-performing industries. Another area to look at is to increase a portfolio’s exposure to healthcare, real estate and technology. Consider modifying your exposure to fixed income because this is probably an asset class that struggles in a rising rate environment. In bond portfolios, consider increasing the quality and shortening the duration to reduce risk. The goal is to avoid a negative real return for longer than necessary.
  1. Maintaining an active rebalancing strategy. Rebalancing reduces risk and tends to bring an investor back to their initial intentional equity position. This looks different in an IRA or other qualified account versus a traditional investment or trust account, which are non-qualified. Ultimately, the intentional equity position may be something to increase as it relates to strategic overweighting and underweighting.
  1. Exploring tax loss harvesting. Typically, most investors don’t want to think about losses, but the tax implications of selling an underwater security in favor of better tax treatment can be substantial. Tax loss harvesting is usually done annually around December. This may be a year to look at whether it’s worth it to accelerate that approach.
  1. Making regular contributions to investment accounts. If an investor is still earning income, whether they’re retired or still in the workforce, it’s important to continue contributing to investment accounts. An IRA or 401(k) is a great way to level out some of the dips and rebounds in an uncertain market and balance out the cost basis.
  1. Managing how money is distributed from investment accounts. The other side to making regular contributions is actively managing how money is withdrawn. Investors who may have a large cash need coming up – a medical expense, college tuition payment or home renovation, for example – will want to look at all sources of income from their investment accounts. Selling securities to fund a short-term cash need would trigger a taxable event, whereas using the equity in a home might be the preferred option in some cases. A non-IRA account with an investment or trust piece to it is another option to fund short-term cash needs. Assets in the account can be used as collateral for a line of credit at an advantage rate.
  1. Using pre-tax money for charitable contributions. Instead of writing a check with after-tax income for charitable donations, investors can consider donating highly appreciated stock instead. Selling highly appreciated stock could generate a large tax bill, but if it’s donated to a charitable organization, they would sell the stock at a non-taxable rate due to their 501(c)3 status. Many people over age 70 ½ who take required minimum distributions (RMDs) can also redirect that money to charitable giving. This is an especially good strategy if the money from the RMD isn’t needed.

The first thing that investors can control is to have a plan. Simply collecting accounts and accumulating assets is not a plan. It’s also important not to let emotions get in the way of making sound financial decisions. Waiting too long for a market to experience an upswing is a good lesson but often an expensive one. Opportunities often present themselves in short periods of time when the market falls.

Time in the market, not timing the market, is the principal factor for a successful outcome.

Every investor’s situation and goals are different. Make sure to consult with your Adams Brown wealth consultant on how to manage investments and financial expectations in a downturn.

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