Preparing for Market Storms

The financial weather seems to be turning nasty and market storms are on the horizon. Inflation is blazing and the Federal Reserve is expected to raise interest rates. In January the ETF SPY (S&P 500 index) lost 9.2%, but then regained some back.

The market storms during January. 
 Chart showing the exchange traded fund, SPY, during January.  It lost over 9% before recovering some before the end of the month.  It lost 5.27% for the month of January.
The Market Storm During January, 2022

Can anything be done to protect your portfolio? Well, yes, but perhaps not the way one would expect.

Some might suggest moving your portfolio to more conservative positions, such as cash or cash equivalents, or sectors that might do well in market slowdowns. The problem is overwhelming evidence suggests it doesn’t work.

The challenge is knowing when the downturn will begin and when it will end. The academic research over the last several decades implies that even professional money managers can’t time the market. So, don’t be tempted with trying to outsmart the markets. Instead, use time, proper allocation, and willpower.

Mathematically, time eats volatility. Generally, one should hold the investment for many years to improve the odds that the positives will outweigh the negatives. But you should expect to see losses regularly.

In fact, we see losses in stable investments almost continuously when inflation is included. The stable investments have the highest risk of losing value over the long term. Overweighting stable investments increases your odds of long-term losses and shortfalls.

The best solution is to select the proper allocation for the time the money will be invested and the risk desired. Then stick to it. Calculating the best selection of funds, statistically speaking, is complex, so seek assistance from an advisor if needed.

Here are a few things to consider if you really want to act.

  • Make sure your portfolio is rebalanced correctly. With the favorable stock performance of recent years, your portfolio may be overweighted toward stocks.
  • If you have a low-interest loan and are paying extra on it, maybe you should stop. Debt in inflationary periods can be beneficial because the fixed payments will get smaller relative to other costs and hopefully income. Instead, consider purchasing US savings I-Bond at Treasury Direct. Its variable yield is currently over 7% and it’s backed by the full faith and credit of the federal government.
  • Take advantage of a portfolio drop and perform Roth conversions. Suppose you want to do a $10,000 Roth conversion. After a loss, a $10,000 Roth conversion will be a larger percentage of your IRA than it was before the loss.
  • Sell your losers in your taxable account to reduce your tax bill. You can purchase other securities that might have similar characteristics, but there are IRS rules about this that you should be careful of.
  • Make sure you have 3-6 months of spending needs socked away in your bank or money market account.
  • If you are in retirement and drawing money from your investments, examine your cash flow. Reducing spending in tough times can protect the longevity of your portfolio.

Finally, be strong. If you’re feeling anxious, don’t watch the market, your portfolio and certainly don’t watch financial news. Practice disciplined neglect and press through the market storms.

The suggestions above come with potential risks and rules you should be aware of. Please talk to us or your advisor or before executing any steps.

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