~Risk~

Jerome Powell’s abrupt re-posturing towards inflation sends a resounding message to listening investors: risk matters again. Effective risk management first requires thought and planning. If a pair of winter climbers doesn’t first think about how to survive a whiteout, the probability of separation and disaster escalates when the cloud of wind and snow joins their expedition. Applying sound principles to manage identifiable risks, like carrying a small 15 foot rope to quickly tie to your climbing buddy in a whiteout, can prove critical. What are today’s identifiable risks, and what principles aid in their mitigation?

Accepting the existence of risk enables risk identification. The “fight or flight” response mechanism won’t help you after falling through the ice of a mountain river, or when your tech stocks crash 50% in a week, only forethought will. I perceive the following risks are with us today:

• Powell could be behind the inflation curve, a nightmare scenario for stocks, since inflation and interest rates could rise together.
• Powell’s new inflation posture means the stock bubble suddenly has an enemy with a pin.?
• Recent and near-term retirees appear to be facing the dreadful ‘early-retirement bear market’.
• Bonds appear to be in a bigger and more dangerous bubble than stocks.
• Present inflation is eroding the purchasing-power of bank savings at a rate of 50% every 9 years!
• The yield curve may be indicating concerns about the economy.
• Tax hikes are coming.
• Social Security is likely to be ‘means tested’ due to underfunding.

I would liken the present financial landscape to climbing Mount Denali in January, where life-threatening risks are literally everywhere. Consider whether the following strategies may help you navigate your course successfully:

• Increase your emergency savings, and the cash position in your investment accounts.
• Reduce debt, and convert variable rate debt to a fixed interest rate.
• Don’t relinquish earned income without serious consideration.
• Increase your fiscal discipline. Get aggressive and creative in reducing expenses.
• Buy capital-efficient, industry-dominating, dividend-paying, dividend-increasing businesses at a good price.
• Own a chaos hedge or two.
• Establish a long-term mindset towards high quality, high conviction holdings, and reinvest dividends throughout the market cycle.
• Have a clearly-defined exit plan on all ‘non-forever’ holdings and follow it.
• Stay away from the extremes of fear and greed. Don’t hide from inflation in the bank. Avoid making a big bet on a risky position, or doubling down on a losing position. Follow the position sizing rule of 3%-5%.
• Dollar cost average throughout the market cycle.

?Think about it, Shaun

“Rule #1 is never lose money. Rule #2 is never forget rule #1.” ~Warren Buffet

“He who had received the five talents came forward, bringing five talents more, saying, ‘Master, you delivered to me five talents; here, I have made five talents more’.” ~Matthew 25:20

“Through many dangers, toils and snares I have already come; ‘Tis grace hath brought me safe thus far, and will lead me home.” ~Lyrics from John Newton’s Amazing Grace

?The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.

All investing involves risk including the possible loss of principle. No strategy insures success or protects against loss. Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.

?Asset allocation does not ensure a profit or protect against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

?Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.