I try to practice what I preach when it comes to investing behaviors. I don’t check my accounts often, and I stay focused on the long term picture. However, it is impossible for me to ignore markets and the noise surrounding them because, as you know, managing wealth in the markets is in my job description. So during periods of volatility like we are currently facing, the first thing I do in the morning (after I hit snooze) is check what the futures are doing.
I’m not obsessing over the markets because I’m concerned about my personal account performance. I obsess because I am enormously passionate about my clients having great outcomes. One of the challenges that investors face on the way to great results is all the bumps in the road along the way. My job (our job at FSG) is to get you through those bumps by helping you avoid making illogical decisions.
We are facing a bump in the road right now, and I can feel anxiety and panic coming from some clients. I’m writing this today to hopefully relieve some of those emotions and explain what has happened in markets, why it has happened, and what FSG is doing. In addition, this past Monday, the 9th, Mark Carter and I recorded a video talking about many of the same things. That video can be viewed at this link: https://fsgmichigan.com/vlog/anatomy-of-a-market-crash-2022.
What has happened and why!
- The stock market has sold off, with overpriced growth stocks being down the most. (chart below)
- This is due to inflation fears and the tightening of monetary supply/interest rate increases.
- To combat inflation, the Fed is raising interest rates.
- When interest rates rise, bonds go down in value; as a result, bonds are down in addition to stocks.
- Moderate risk investors who typically own a combination of stocks and bonds, have traditionally relied on bonds to soften the blow of stock market corrections and have experienced negative returns nearly all year.
As you can see below, the S&P 500 (green line) is down 17% this year, the Nasdaq (red line) is down over 26%, and bonds (black line) are down 9.5%.
In the January market update this year, I discussed how high-priced growth companies (like the companies that make up the Nasdaq) would likely face the most headwinds this year. Traditionally, we have been underweighting these types of stocks and this was especially true heading into this year. This is proving to be prudent as growth stocks have taken the brunt of this correction.
One of the few points of light in the market this year has been gold. As you may know, we own gold in many of our portfolios. For example, you can see below how gold has held up to stocks and bonds YTD.
We are continually monitoring portfolios for strategic adjustments, and this week in many of our portfolios, we implemented several trades. We feel that the bond market will likely recover; however, the length of time this may take does not offer the optimal risk/return ratio. We still hold bonds, but we trimmed our bond allocation in favor of an alternative allocation. We feel that although stocks may face further headwinds for long term investors, buying stocks while they are down has proven to be a prudent decision. As a result, we have implemented a defined outcome ETF (you may be asking what that is).
A defined outcome ETF is a fund that uses a combination of options strategies to participate in the upside returns of the market while limiting downside losses. Basically, we want the opportunity to participate in the long term gains of the market but understand that there may be further losses in the short term, which we would like to protect against. That is exactly what a buffered ETF attempts to provide. As the saying goes, there is no free lunch, which is true. These strategies have drawbacks, such as your upside being limited, dividends are limited, and losses cannot be 100% guaranteed. We carefully considered each of these drawbacks before implementing this strategy and believe that the juice is worth the squeeze.
Lastly, I would like to leave you with some historical context about market corrections. We are currently in a 15% correction, which happens on average about every three years. According to the Schwab Center for Financial Research, these corrections are often followed by substantial rebounds. Since 1974, the S&P 500 has risen an average of more than 8%, one month after a market correction bottom, and more than 24% one year later.
My big point is that you should not try to exit the market during periods of volatility so that you can “time” the bottom and get back in. Market timing does not work; it has never worked and is a fool's errand. Panic is for fires, pride is for accomplishments, and patience is for investing!
This commentary on this website reflects the personal opinions, viewpoints, and analyses of the Financial Strategies Group, Inc employees providing such comments, and should not be regarded as a description of advisory services provided by Financial Strategies Group, Inc or performance returns of any Financial Strategies Group, Inc Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Strategies Group, Inc manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Written by: Brice Carter