At Fiduciary Financial Partners, we know that there are growing concerns for both our clients and the community in an ever-changing marketplace. That's why we stay up-to-date with the latest events impacting markets. This blog post discusses the 5 Questions on the Minds of Investors.
1) What are the impacts of the Russia-Ukraine crisis on markets?
First, we would say that these events are shocking and awful on a human level. We sympathize with those directly affected, and we hope this crisis resolves very soon. The Russian invasion of Ukraine and the strong response from the West in the form of sanctions has increased volatility in a market that was already experiencing considerable turbulence going back to the very beginning of 2022.
The Russian stock market is down over 30% year to date, and the sanctions have only further disrupted an already strained global supply chain. The additional market volatility results from investors reacting to new information and adjusting their expectations. This type of volatility happens every time an unexpected event or crisis occurs. It may not feel good when prices are adjusting downward, but it is a sign that markets are functioning properly. Eventually, equilibrium will set in, and the extreme volatility will subside (at least until the next crisis or unexpected event occurs).
2) How can I protect my portfolio against market downturns?
During crises, it's best to react rationally and not emotionally. That's where working with a trusted fiduciary might help to limit financial stress. When investing long-term, it's crucial to stay disciplined during the good and bad. Therefore, during volatility, it's best to tune out the noise and stick to the game plan you and your financial advisor set.
Our suggested approach to dealing with market volatility is the concept of portfolio rebalancing. Portfolio rebalancing is simply executing the idea of selling high and buying low. When market volatility strikes, some securities in your portfolio will decrease in price more than others, which causes their values to fall below target. As a result, some other securities will naturally become out of tolerance to the upside, making up more of the portfolio than desired. Rebalancing is the act of selling the above-target securities and using the proceeds of those sales to purchase the below-target securities, thus bringing the overall allocation back into balance or in line with the target.
3) How should investors position differently for inflation?
Today, there's no escaping inflation. You probably notice it when you're filling up your gas tank or going on your regularly scheduled grocery run. If you're looking to lessen the negative impacts of inflation on your portfolio, focus on making investments that have historically held up well during inflationary periods. That can be done by creating a diversified portfolio with different types of stocks and bonds. For example, including small company value stocks, large-company stocks, commodities exposure, or treasury inflation-protected securities (TIPS). Evidence suggests that you will be able to outpace inflation, maintain your purchasing power, and achieve your financial goals over the long term by employing a diversified stock and bond portfolio. We offer a complimentary portfolio review to help you stay on top of your financial goals. Click here to schedule your free consultation today.
4) My bond funds are down. Should I make changes?
We've heard that question a lot lately, and that's a normal reaction to poor bond market performance. Yet, keep in mind that declines within the bond market are nothing out of the ordinary. While bonds are relatively safe investments and often do a great job of offsetting negative performance in the equity market, risks are still involved. However, to answer the question "should I make changes?" the answer is, "maybe."
This is an excellent question to address with your advisor. Your bond portfolio's duration and credit quality should match the goal of why you are holding bonds in your portfolio and support your financial plan. If the primary purpose of bonds in your portfolio is to act as a buffer against equity declines, then you probably don't want a risky bond portfolio that is trying to squeeze out every possible drop of yield by going either too long or too far down the duration or credit spectrum.
5) Should I invest in bitcoin/cryptocurrency?
Cryptocurrency is seemingly the hot new thing that everyone can't wait to get their hands on. Our take on bitcoin is that it's a very speculative investment. What we mean by that is, when we are evaluating investing in the stock of a company, we can look at the earnings of a company as well as the dividends it pays and arrive at a reasonable range of prices that a prudent investor would want to pay for a share of its stock. You can do the same thing with a rental real estate property or a tract of farmland. Since Bitcoin is simply worth what the next person is willing to pay for it, it's impossible to predict its future return. That makes it very hard to use as part of a financial plan.
Therefore, when building a financial plan, you want to first focus on building a solid foundation with a goals-based approach using stocks, bonds, and traditional currencies. Once you have that all squared away and have extra wealth to work with, you can take a more speculative approach and pursue digital currency such as Bitcoin or other forms of cryptocurrency.
Are you interested in learning more? Then, check out our latest webcast with Managing Principal and Chief Retirement Officer Nick Economos, where he discusses Navigating Turbulent Markets further with Dimensional Advisors Vice President Apollo Lepescu.