For the past several months, 2022 has been a quite the ride for investors. Several factors impacting the the market have led to inflation and higher interest rates. Corporate earnings have decreased and returns on bonds are down double digits. However, with planning and strategizing, long-term investors can ride this downturn out, with the potential of positioning themselves advantageously once the market changes.
Currently the Federal Reserve is trying to bring inflation under control by raising short term rates and selling its securities. This may slow inflation, but it also will impact the economy by slowing growth. This action along with the surge in coronavirus cases, war in Ukraine and global energy prices all combine to cause the possibility of a recession resulting in job losses and greater economic and market impact.
So what advice can you give your clients? If you're dealing with short-term investors, no one can predict what will happen but as a long-term investor, which most of our clients are, this downturn may hold some excellent opportunities and can take advantage of the market decline.
First and foremost, long-term investors should be judicious when listening to the news as there is no definitive guidance even in a close study of incoming economic and financial data. What we see are opportunities to get into several technology stocks, which may have been out of reach over the past couple of years. Currently, there has been a deep dip in tech stocks overall. As consumers, we know that technology is not going away—from our smartphones to our online shopping, the signs are of an increase in usage. This lends a unique opportunity for investors to buy into this market and while many tech companies have been overvalued and have unrealistic earning expectations, some established companies have the potential for earnings in the long term.
As in all market environments, we advocate a diversified portfolio of value and growth. Energy stocks had been an excellent investment sector in the past but have taken a hit, so we are cautiously examining some opportunities there in the natural gas arena. As you know, investing in ETFs offers the investor a low-cost participation in a professionally managed vehicle that is structured to replicate the performance of an index or a particular industry or asset class. ETFs also offers investors more liquidity and diversification in a single investment rather than needing a group of assets to gain exposure to an asset class.
For our clients, we have been increasing investment in bonds slowly as the U.S. Treasury yields continue to be low, with the 10-year Treasury at only 3%. We are also recommending 5%-10% in cash. Having cash handy allows investors to buy the dips in the market as well as ensuring you can pay your bills and have enough on hand for emergencies. Keeping cash in a safe place and one that provides a small return is also preferred – these include high-yield bank account, Treasury bills, money market accounts and I- bonds.
Money needs to grow, and it is important to keep asset allocation aligned with your client's long-term goals. While recessions are cyclical, their timing and severity are hard to predict.
Our best recommendation is to encourage your clients to remain calm and continue contributing to their savings, IRAs and 401(k)s; staying focused on retirement accounts while continuing to invest during the downturn, buying investments at attractive prices. Patience and long-term goals while being open to and having the resources to act on opportunities in this down market is key. Investors cannot predict the future however with a lot of planning and sound financial advice, they will be able to ride out this market.
Colleen Kelleher Sorrentino is Managing Partner, Kelleher Financial Advisors