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First off, let’s acknowledge a simple reality: There’s a lot going on.
Within the first few months of this year, equities pulled back significantly in light of Russia’s invasion of Ukraine. We’ve also witnessed surge pricing in commodities where Russia is positioned, especially in energy markets, as well as metal markets.
For the first time in a long time, we are seeing relatively significant market volatility. Market ups and downs should be expected. But that doesn’t mean the ride is always easy to stomach.
Below, we’ll dive into how to maintain your focus on your long-term financial plan. But first, let’s get some perspective.
What Has Changed?
Over the past decade or so, the stock market has enjoyed extremely accommodative monetary and fiscal policy. Ample liquidity and low rates have been key drivers of a long bull market.
During the same time period, stocks have benefited greatly from the creation of new money. U.S. M2 money supply, after having grown consistently at around 6% for many years, spiked with policy response to the pandemic and is now about 40% higher than it was two years ago. This large increase in money supply has fueled stock price increases and high inflation.
The Fed recently increased the pace of tapering asset purchases. With elevated equity valuations, record inflation at 8.5%, low rates, and a quickly recovering economy, the stage is set for tightening. We believe reduction of economic stimulus programs is a fundamental shift in the market dynamics that investors have grown accustomed to over the past decade.
So far in 2022, stocks have kicked off the year in the red. This doesn’t come as a major surprise since there hasn’t been a meaningful correction since the initial pandemic sell-off.
What Can I Do?
Knee-jerk reactions to market events like this are rarely good for your financial strategy. With so many external factors, here are a few key considerations to staying on track.
1. Stay disciplined.
Think of your diversified portfolio as a battleship, designed to weather all storms. An important element of a healthy portfolio is ensuring your portfolio fits your personal investment style, your risk-tolerance level, and your long-term goals – and then stick with it.
Now is not the time to make wholesale changes; that’s likely to impair your portfolio. International equities are down, and you may be wondering if you should sell out of them. The answer is most likely no. From a valuation standpoint, international equities are very well positioned and attractive.
2. Prioritize tax-loss harvesting.
Tax-loss harvesting is the investing technique of selling depreciated securities to offset gains within a given tax year. The concept is slightly counterintuitive—after all, you’re supposed to sell high, right? But the idea is not to eliminate exposure entirely. With the goal of reducing your tax bill, it can function as a temporary sale, after which, if you want, you can buy back the same stock following a 30-day waiting period.
Think of it like rotating out of one investment vehicle to another – maintaining the exposure while helping mitigate your tax bill.
3. Review your financial plan.
This is a great opportunity to really look your financial plan in the mirror, especially when it comes to thinking about your cash reserves. Fortunately, we’ve had a very prosperous five to seven years, and many diversified investors have done really well.
Of course, there are a few foundational priorities for your cash:
- First, make sure you have an emergency fund (three to six months worth of spending).
- Anything beyond that, pay down any high-interest debt.
- Finally, earmark it for tax liabilities or anything else coming down the road in the next 18 months (like a car or home downpayment).
If your cash doesn’t fall into one of those three categories, now may be a good time to deploy it into the market. Consider it an opportunity to leg into the market at a relative discount.
With that said, we want to reiterate that these are not reasons to deviate from your strategy. With a long-term approach to investing, you will be well-positioned to weather the current market environment.
Looking for a better way to manage your money? Consider talking to a fiduciary financial advisor for personalized advice and wealth management.