Cloudy Skies Return
Here in the Sun Belt, it’s common to have sunny days that seem to stretch on forever. Just clear, beautiful skies day after day after day. I’m not sure I ever experienced this growing up in Pittsburgh or during my four years in Syracuse, NY. ?In fact, if you got a warm, sunny day in the Spring, you went crazy! You skipped classes, played golf and hung out on the quad all day.
But, my entire career—some 23 years--has all been spent in the South. Here sunny days are as plentiful as sweet tea. You can easily get lulled into believing every day is going to be sunny. So, when a string of dreary, cloudy days pop up, it’s like a shock to the system. It’s unpleasant.
Arrrgh, where’s the sun?
That’s about what it’s been like in the markets recently. We’ve had two-years of near constant sunshine, a rally that’s only been temporarily interrupted by cloudy markets—brief selloffs. The longest was back in the fall of ’23 when interest rates were on the rise. The 10-year Treasury briefly touching 5% and 30-year mortgages momentarily eclipsing 8%.
Given the power of recency bias, it’s easy to assume sunny markets would continue unabated into the future.
Enter this week. Yes, it’s true volatility has returned. It’s also true the market hasn’t really sold off all that much. We’re still within 5% from the all-time highs in the S&P 500.
What’s happening and how should we respond financially?
The first thing to remember is that markets look ahead, months into the future. They make predictions as to what’s going to happen. Sometimes they’re right. Sometimes they’re wrong. Right now, there are indications the market is worried about future growth. It’s a big reason Treasury bonds have been rallying in recent weeks, sending yields lower.
Part of the growth fear relates to the heightened uncertainly coming out of Washington. We’re also seeing various measures of the consumer start to weaken. Soft data around consumer confidence has gotten gloomier. Same for some hard stats around consumer spending. But, none of it to this point portends a fall-off-a-cliff economy. In fact, GDP is still expected to hum along above 2%, which is fairly healthy.
This growth scare is not too dissimilar to what we saw last summer when the unemployment rate started to tick up in a meaningful way. Different circumstances, but similar fears. That growth scare came and went. Only time will tell what comes of this one.
How should you approach your investing?
First, harness the value of volatility. Use it as a checkpoint to make sure the portfolio you have matches your investing personality, your risk tolerance. Second, try to avoid the noise and focus on your goals. Get clear on your timeline. Here’s an example of what I mean:
Once you understand your timeline, you can better plan your money. Remember the goal is to protect principle in short term, protect purchasing power over the long term.
So, taking the example above, here’s one way to think about your investments. The down payment is right around the corner so it should be protected primarily through cash or money market funds. Your son’s college education may be a mix of stocks and bonds. Your retirement is far into the future so it can be heavier on growth assets like stocks that have greater potential to outpace inflation and grow your purchasing power.
Where things get tricky for many people is managing a major goal that’s spread out over several years or decades. What if your son starts college in two years? Part of the goal is two years away. Part of it is 3, 4, 5, maybe even 6 years away. Thus, you may choose to remain in cash to pay for the first year of college, but diversified bonds to help pay for the rest. Each year, you can shift some bonds to cash as new bills come due.
Same for retirement. If you’re planning on retiring next year, part of your goal is, of course, next year. Part of your goal is being able to pay for your lifestyle in 5, 10, 15, 20 and 30 years from now. So, you need to think about your strategy as goals with separate timelines. Here, you may wish to have cash on hand to fund the first two years of retirement. Bonds to pay for the next three years. Then, stocks to fund years 5 and beyond. Once again, you’d routinely shift to more stable assets as you spend down your cash. ?This is how you protect principle in the short term, protect and grow purchasing power over the long term.
Volatility is simply a routine part of investing. In fact, it’s the reason stocks have historically delivered better returns than bonds and cash. Use it to your long-term benefit by maintaining a strategy that also takes care of the short term.
Time for you to respond:
How do you feel about your investment strategy today?
This material is provided as a courtesy and for educational purposes only.? Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.?
?All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC.
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