Market Volatility, War, and Inflation: Where Do Investors Go from Here?

Between market volatility, war in Europe, historic inflation, and the lingering impact of the pandemic, the world feels even more uncertain than normal. Considering these headwinds, it is unsurprising that the most common question we are hearing from clients is: “Where do we go now?”

While it may seem counterintuitive, history shows that the best course of action for savers and investors is to do nothing – to stay the course.

As I tell my clients: it is important not to sell when there is a pull back or a market downturn. By remaining invested, you are achieving maximum results by taking advantage of the best single day returns.

For example, Putnam Investments explains that by simply staying in the market over the last 15 years, an investor earned $24,753 on an investment of $10,000 in the S&P 500. Missing just the 10 best days over that 15-year period would result in a 5.6% reduction in annualized return.

As humans, we try to avoid losses – and many of us are naturally inclined to want to time markets: getting out when things are bad (to stop the bleeding), and getting back in when things are good (to ride the momentum). After all, it is much easier to watch your portfolio go down 10% than it is to watch it go down 20%. But decades of research shows that even the best professionals fail when attempting to time the market.

To that end, the most important role of an advisor during periods of uncertainty is to help clients stay the course and adjust their portfolios to keep up with market trends. For example, I may want to increase a client’s exposure to large companies or reduce exposure to international markets. These adjustments ensure clients are not exposed to unnecessary risk, such as having too many assets invested in the stock market or in one particular sector.

This principle also applies to bonds. While bonds are known as a safe haven for investors, it does not feel that way when government bonds are down 4%. And inflation means they are now worth less, as new bonds come out with better rates. But there are options we can take here to bolster our clients’ portfolios, as well.

For example, by increasing exposure to large equities and limiting the amount of long-duration bonds: clients are more prepared for rate rises. Another option is to invest in commodities or real estate, both of which help hedge against inflation.

We also pay close attention to credit risk and ensure that clients have the safest bonds available. Although these bonds might pay less, clients’ assets are exposed to higher credit investments and not chasing yield. Again, we are limiting unnecessary risk.

We know that these are tough times, and it can be scary when there are no true safe havens for one’s money. At Farther, we continue to follow the principles that define us as an organization: plan goals, stay the course, and make the changes necessary to keep clients’ portfolios on track, according to the risk tolerance and time horizon.

We will move forward together.