As we wrote in the Rantings last year, “free money” had to end. The accommodative Fed and the low interest rates that saved us from “Covid economic meltdown”, must be unwound. Problem is, cost of money is thee basic component of market valuation and rising rates aren’t good for ANY asset (stocks and bonds included). That’s the yin and yang….. rates going up signal a strong and growing economy (which is good). The rise in rates to a new equilibrium isn’t good for assets (which is bad). The change of circumstances (rising rates) has already wrecked the most speculative (risky) stuff. Most crypto is down 60% or more and some as much as 80%. Meme stocks are being brutalized as are the highflyer “Covid lockdown stocks”. As the cheap money goes away and rates rise, the risk in the risk/return is now evident. Throw in geopolitical issues (Russia/Ukraine) and the disruption in the labor force, the asset deflation in risk assets is dizzying. According to the “pundits”, greed was the theme in mid 2021, fear would seem to be the theme for now.
One interesting part of all this is that it’s fairly normal and its long term healthy. No, it’s not fun and nobody likes down markets. Seeing negative numbers on the portfolio statement is never enjoyable. The unfortunate part is that many who have “invested” have very little clue of what a down market looks like. I’m NOT talking about long term clients with a balanced portfolio who have been here before. I AM talking about the under 40 crowd who believe putting all your money in crypto is the wave of the future. They haven’t seen bad markets… As with most market “turbulence”, when things get dicey…. everything goes down. The garbage gets taken out and the diversified and correctly allocated persevere and hold their own. The game of “losing less” comes into play and acceptable downside is once again the norm. If your entire life savings is in crypto and its down 70 percent, you have a completely different psychological reaction than the client with a portfolio decline of 8 percent. That’s the key, the basic that always gets forgotten in bull markets. Your portfolio should mirror your risk tolerance and your comfort zone, not somebody else’s. Downside management is just as (if not more than) the critical element and its very much an individual thing. What I say is what the shiny TV (or social media) people don’t…..If one cannot handle the downside, they won’t be invested for the good side. Corrections and declines are inevitable not outliers. Plan for both.
As always, thanks for listening. We are always here for you and ready to assist. If you would like to chat about your portfolio, financial situation, or anything else, don’t hesitate to reach out. Talk soon and have a great week!