What Now? Our Take on the Markets Q4 2022
Excerpt from LNWM Economic Commentary:
As practitioners of behavioral finance, we realize that now and into next year there will be peak temptation to duck and take cover, meaning sell equities and bonds until the dust settles. That is especially the case in 2022. This year’s bear market in both equities and bonds has dragged down annualized portfolio returns for the past one, three, five, 10 and 15-year periods.
Selling and raising cash appears to be the course being followed by many investors, both professionals and laypeople, as net cash flows out of equity and bond funds are reaching levels not seen since the onset of the pandemic in 2020 and the Great Financial Crisis of 2008. People need to sell for a variety of reasons: their asset allocation models were based on bull market scenarios; they have too much debt; or their portfolios cannot sustain their near-term cash flow needs. Additionally, many professional asset managers and Wall Street strategists today have never experienced a period of rising interest rates and inflation and are trying to figure out how to adjust to the shift in market regime.
The above does not apply to our firm. We base our long-term portfolio allocations on models that include extensive data sets for both bull and bear markets; we conduct ongoing financial sustainability analyses for each client, to ascertain the level of confidence they can have in their portfolio’s ability to fund needs and goals; and we advise on sustainable debt service levels as well as adequate cash reserves to support short- and intermediate-term needs. All these efforts combined are designed to act as a buffer, allowing growth assets in portfolios to undergo downside volatility without having to be sold at inopportune times to raise cash.
What all this means is that sound planning enables our clients to have the wherewithal to stay invested during bear markets so they can benefit from the subsequent rebound whenever that occurs. Year-to-date and historical performance numbers can and do change quickly. Evaluating and potentially changing your risk-return profile should happen when markets are stable and only if your financial goals/needs change. Based on decades of experience managing portfolios, we firmly believe that it is counterproductive to de-risk portfolios when the markets are being driven by risk- aversion and unprepared investors are being forced to sell.
Read the entire Commentary here.