When all else fails, and you can’t seem to make sense of the world anymore, much less the price volatility of our investments - maybe the best course of action is to start from the beginning and remind yourself this:
Why do I invest?
Perhaps by revisiting the origin of why we started to do something, we then find the resolve to stay the course through these challenging times.
But first, I thought I should ask… how are you doing?
Recent events in our country and in our world still feel “unprecedented,” don’t they?
Yet that word does not even begin to describe the horrific inhumanity unfolding right before our eyes on today’s world news. The scenes from the Israel-Palestinian conflict are gut retching. Sadly, as viewers; we’re almost accustomed to it now, having witnessed this type of imagery for the past 1.5 years, with the ongoing war in Ukraine.
Further complicating things are the events of our own country’s political landscape, as our House of Representatives are in an almost comical state of disarray, and with the risks of a government shutdown seemingly constant.
No wonder we’re feeling a little anxious about things. And I suppose this is right about the time I’m supposed to pivot to a glimmer of hope, or “insert pragmatic paragraph, here.”
Look, I get it. You don’t want to hear from your financial advisor anymore, because they’re just telling you the same things they’ve been saying, regardless of how disjointed the world seems:
Stay invested.
Keep adding to it.
It will come back.
But (I promise) – investment advisors, financial advisors and portfolio managers alike have all grown tired of reciting those same “rules of thumb” over and over again… just as much as you’ve grown tired of listening to it. At least – I have.
But I keep coming back to one main question… why do you invest?
Do you invest to make money quickly? Then you’re the type who probably won’t even make it this far into this blog post. AH HA! NO SOUP FOR YOU!
Do you invest to retire someday?
Do you invest to leave money behind for your kids? Your grandkids?
Do you invest for income?
If the answer is “yes” to any one of those, I could give you three good reasons why you should LOVE this investing environment:
Rates have not been this good in over 15 years. If you are risk-adverse (or if you think your risk tolerance is changing) then the landscape has dramatically shifted back in your favor.
Stocks look affordable, again. With the exception of March of 2020 (COVID) and 2022’s dramatic sell off - this is the cheapest the S&P 500 has been in over 5 years (still above average, however).
Access to asset classes like alternatives and digital assets has never been easier or more affordable. With the SEC very close to approving a spot-bitcoin ETF, and as investment companies push private credit strategies to retail investors - the “hoops” to jump through to get even more of a diversified portfolio (beyond traditional stocks and bonds) have decreased significantly.
Please note: this is not an endorsement for bitcoin nor does it constitute a recommendation.
Nonetheless, we are in a bear market, and investing during a bear market can elicit some emotional reactions. It can be very difficult to stick to a long term strategy when there’s so much… red, especially when both stocks and bonds are selling-off in tandem, and often times quite severely. It is during these exact moments of pain when an investor’s advisor can really help determine short term actions to take, that address the angst of it all; while still staying pragmatic and long term.
I should also heed investors on what happens when we abandon completely a long term strategy due to a bear market occurring, because this course of action can have lasting effect. Although the initial reaction can have some perfectly fine logic to it, often times the issue which “selling out” creates is the additional mental hurdles that follow.
Let me try and explain what that looks like, as I think it is important to revisit, with the ultimate point being that working with your advisor to create a compromise between your short-term anxieties, amidst this uncertainty, and your long term goals is still the #1 course of action (and my perspective is actually first-hand…. but also witnessing it with clients who did so on their own):
First, when the losses occur; you want to sell out of your investments (known as “loss aversion”), ignoring any potential gains to be had in the future; or without concrete plans of what to do with the money; or that the money actually represents a future “time horizon” (in other words, it is not meant for “today- money”). So you sell out of your investments, and now that long-term money is sitting in cash.
Second, while your long-term money is now sitting “on the sidelines” - you’re faced with a new set of problems - when is the perfect time to go back in? At this stage, a period of “indecision” kicks in, as the brain basically shuts down, due to sheer exhaustion!
Oh, the spooky horror.
It would be unfair of me to say completely “this will be your experience, if you abandon your plan now.” The experience described above is simply the “text book.” The point is – you can choose to work with your advisor to create a compromise that addresses the anxiety created by this uncertainty, while still staying pragmatic and long term, in lieu of making a knee jerk reaction.
Additionally, every investor has the right to change their mind about their risk tolerance! As one of my past mentors once said, “it’s never too late to rebalance.” If you believe this is happening to you (that your risk tolerance has changed) then please call me so we can address that as well, and I can explain what that process looks like.
I understand geopolitical risks seem extremely high right now, and they are. For me, the atrocities that we are witnessing brings serious perspective on the country I live in (being born in the USA is still the number one global lottery ticket of all lottery tickets, while we must keep in mind - there are still wars going on in our own borders…) and sadly what is going on in other parts of the world is not even the most troubling part for markets.
To be more specific, the more troubling part for investment allocators at this moment is “where did the buyers of US debt (bonds) go?” as bond prices continue their decline. Rate sensitivity is still the main culprit for this particular pocket of volatility, and discussed in my latest volatility piece.
I don’t think buyers of US debt went anywhere! I think they’re patiently waiting in the wings, and I’m starting to think that they have a “real rate” in mind which they’d like to see the bond market go to first, before they swoop in and start buying. Currently, that real rate is about 3% (nominal rate less inflation), and what the bond market is telling us is they think (with rates where they are…) it will not be enough to stifle the pace of inflation.
Note: when I say “real rate,” I don’t mean the nominal rate US Treasuries are now paying, but rather the difference between the nominal rate and inflation.
But I do believe that time is coming soon, in which bond prices find a floor and rebound, and I do believe it will be fast. I believe allocators are wise to sit tight with their bonds, and start “extending their durations” of their maturities, because you won’t want to miss the other side of this rate cycle. But again, I think it will move fast.
The second part of this rapidly changing investment landscape (beyond rates being higher for longer) is the emergence of a fully functional and mature private credit market. To put it bluntly - private credit has taken a lot of would-be bond buyers away, as companies like Blackstone and JP Morgan Asset Management, etc. have started to package private credit products towards retail investors like you and I. But even before these products existed - the private credit market is grown to be massive. As a result, many very healthy US companies are choosing to stay private! Gone are the days when companies needed to go public to reward their founders, much less finance a growth strategy. Nowadays, there are so many options for companies to get financing privately, and not have to go through the hassle of an IPO. Private credit markets can help investors gain exposure to these segments of the economy, but there are additional risks involved, and the actual construction of these products can differ dramatically from shop to shop (additional due diligence is required for these products, especially around liquidity, fees, and underlying holdings).
So, are there paradigm shifts happening that should be considered within the traditional “60/40” opportunity set? Absolutely. But before we even begin to look at fundamentals of the investments we own or are considering owning… I think we must start from the beginning and ask ourselves “why do I invest?”
Exploring this question with a trusted advisor can lead to a very pragmatic conversation and potential strategy “tweak,” if warranted.
Thanks as always for listening. Now let’s hear your side of things.
