This year has been a perfect storm in terms of the driving factors that have caused various markets to decline. If any one of these competing factors had not materialized, it is quite possible that Equity and Fixed Income markets may not be sitting as deep with these year-to-date losses. We point to the main drivers as:
- Inflation
- Interest Rate Movements
- Labor Shortage
- COVID Supply Chain Bottlenecks
- The Ukrainian Invasion
This perfect storm has created a new economic environment that we have never seen before. Can we get inflation under control? Will the Fed playbook that is being is used to combat inflation, ultimately work? Keep in mind that many believe that the Fed has gotten inflation wrong 2 times already; once in not realizing that we had an inflation problem and then thinking that inflation was more transitory. (After getting inflation so wrong, can the Fed now get it right? | The Economist April 2022)
While this recent market decline is inconvenient, it makes a lot of sense when you stop and think about it. The economic cost of emerging from a once in a hundred-year pandemic was bound to take its toll. When you add in the other factors above, it makes all the sense in the World. The fact that the S&P 500 was up big in 2020 and again in 2021 made far less sense. Investors were making a lot of money so most did not question it. When you grind the largest economy on the planet to a screeching halt and then go through an employment cycle where many Americans made more money by not working that by working, the world is officially upside down.
So…. Where do we go from here…Should you “ride it out”? Should you rely on asset allocation to get you through this? Should you hold on to your investments until they “come back”? The answer to that is more complex, but I wanted to mention a few items to be aware of while you are navigating these rocky waters. The economic headwinds that you are facing his year are the strongest you have may have to encounter for some time.
- Basic Math- When you lose 50% of your portfolio on paper, you now need to get a return of 100% on the remaining money to get back to even. This may take years. Is it better to limit the downside in markets like we are currently facing and then focus on “buying the dip”? Holding a portfolio that has lost big may not get you to where you want to go in a timeframe that is feasible.
- Sequence of Returns – An average return on an investment is irrelevant in terms of your own performance. When you actually hold the investment is all that matters. If you retire this year and pull money out of your portfolio while the market is down, this is not the same thing as averaging 10% over time. The stress that the market decline and the subsequent withdrawals will put you and your portfolio in a very tough position.
- “Holding Until it comes back” – We hear this a lot. A ton. Holding an investment until is “comes back" can be fool’s gold. Humans have biases and that is no different with investing. Blind spots can emerge as a result of biases that can cloud judgement. We have covered the math above…Riding a dead horse is not way to win the Kentucky Derby.