Adapted from my letter sent to my private wealth management clients on May 5, 2022.

“I would never bet that I could earn more than you in an up year, but through intelligent portfolio design, I bet I’d lose less in the down years, which will be a long-term win.”
 
As we completed the worst calendar quarter for bonds in decades, and one that saw many of the recently hot growth and “FAANG” stocks plunge as well, I thought back to my finance professor’s words—this was one of the most valuable lessons I learned as a finance major at Ball State University so many years ago. The professor had just explained that in any given year, a monkey picking stocks by throwing darts at the Wall Street Journal was likely to get lucky, but over longer periods of time, portfolio design and managing risk matters—a lot!
 
A classic example is that a -50% drop in the markets requires a 100% gain to return to even, while a -25% portfolio drop only requires a 33% gain to return to even. This seems obvious during a market tumble, but is tough to remember in the midst of bull market euphoria. While seeking to match the market on the upside is exciting (though usually futile as there will nearly always be some focused area of the market on a hot run that will outperform a diversified portfolio), falling less, or what investment pros euphemistically refer to as “downside capture,” can be a real financial win over time.

In the first quarter of 2021, our models have held up quite well. With our financial planning approach, we always aim to have clients prepared for general market shocks, seeking to shelter dollars needed for near-term spending from market risks, but as we’ve shared in past communications, we’ve also positioned portfolios to prepare for the specific risks of rising interest rates, which lead to falling bond prices, and a deflating of overvalued growth stocks—BOTH of which struck in early 2022.

Opportunities Amidst Uncertainty

While no one knows exactly what economic unpleasantness lies ahead (and it would be prudent to expect more), we feel confident in our general portfolio positioning for three reasons:

1. Focus on Value. A focus on fundamental valuations, rather than the market’s hot hand, both in stocks and bonds, has been beneficial. In 2019, we shared that we were tilting toward value, and at the end of last year, we saw two very different stock markets within the overall market. 2022’s sell-off has disproportionately hit growth stocks, while value-oriented stocks look more attractive in the short-term (and history has shown them to offer outsized performance over the long-haul).

2. Long-term Investments. It is incredibly valuable to remember that the stock market has always recovered from past crashes. The good years have greatly outnumbered the bad years, and again, historically, time and the markets are on your side as long-term investors. Also, while there are always understandable impulses to sell assets and move to cash during periods of market turmoil, at the current inflation rate, it appears that cash is now losing about 10% of purchasing power per year! We know that staying in the game has been a proven strategy. Selling from a well-diversified portfolio to avoid or prevent further declines often causes investors to miss critical rebound and forward gains.

3. Buying Opportunities. Whether it’s groceries, shoes, shares of company stock, or real estate, we like to buy when things are on sale, and at this point, we fully expect bargains to emerge. Warren Buffett’s Berkshire Hathaway, which has been sitting on a large cash hoard, has begun buying attractive discounted shares. Further opportunistic buying in portfolios will happen with other managers as well with internal fund rebalancing and through potential portfolio rebalancing moves.

I-Bonds

At the end of the year, I sent an email (7.12% Savings Bonds/Charitable Giving 2021 Deadlines) encouraging you to consider purchasing U.S. Treasury inflation-protected Series I Bonds. This recommendation stands, and, in fact, is even more attractive with a current composite rate of 9.62%! A few quick notes:

•  Money placed into I-Bonds is locked up for one year. 

• You need to purchase the bonds from TreasuryDirect.gov; we are not able to purchase for you!

• Please let us know of purchase dates and amounts, so we can help track in your financial plan. At some point in the future, if inflation cools and interest rates rise, it may make sense to redeem the I-Bonds and purchase other types of fixed income investments. 

Updates

With their recent sell-off, traditionally boring bonds and the shape of the yield curve which plots their returns over time, have been capturing headlines. In a recent Money Matters episode, I shared my thoughts on the bond market, and also offered research on what an “inverted yield curve” may or may not mean for the economy.

On July 14, at 12:00 p.m. CST, we will be hosting a webinar with Cozy Whittman of College Inside Track on college planning. Cozy is a great presenter and has an incredible wealth of knowledge around the college selection and application process—I’m really looking forward to this one!

Our recent wellness trilogy and State Tax Relocation webinars generated quite a bit of positive feedback—thank you!

In other team news, we partnered with The Food Group again and helped package approximately 600 meals for people in need. On a cold day this Winter, several of our brave teammates jumped through the a hole in the ice in support of the Special Olympics Polar Plunge! Despite moments of trepidation, and a breathtaking icy cold shock, we survived and emerged with smiles all around. This has been our experience with past market plunges as well, uncomfortable in the moment, but for those who are prepared with a good portfolio and financial plan, bravery has been rewarded with new highs on the other end!

Please feel free to reach out anytime with any questions or to schedule a meeting.
 
Thank you,
 
Scott