Spring has sprung! Easter weekend passed us by, and the year has begun as expected; volatility is back. Volatility creates opportunity, and to be a good long-term investor, one must take the good with the bad. Over the last 20 years, 24 of the 25 best days in the market occurred within one month of one of the 25 worst days1. Another way of putting it is that market timing is not a recommended investment strategy.
There is usually a “flight to quality” with investors in a negative stock market environment. Flight to quality refers to the herd-like behavior of investors to shift out of risky assets during financial downturns or bear markets. This often occurs with a shift out of stocks and into bonds, where bonds are seen as relatively more safe and thus higher “quality” during rough economic patches. The problem with this year? Fixed income is down significantly given the rise in interest rates. Through May 2nd, U.S. Aggregate Bonds are (-9.50%), U.S. Corporates are (-12.73%), and Municipals (tax-free bonds) are (-8.72%). These are BIG figures for fixed income investments, which is typically viewed as less risky and more conservative-type investments. Bonds still serve as the anchor of the portfolio and should not be abandoned given their recent volatility. During a rising rate environment, there is temporary pain because of the inverse relationship bond prices have with interest rates. But, once interest rates stabilize, bonds pay their investors higher yield amounts. The road to higher income is not enjoyable; it tends to be a bumpy ride. The silver lining with bonds experiencing their third-worst 2-year period since 1926 (average annual 2-year return periods, currently -1.8%) is the two periods worse than this one went on to gain 11.4% and 23% over the following two years, as shown below:
On the equity side, diversification has been key because of the disparity between the different types of equities or across various sectors. Energy is one of the few bright spots from an investment perspective (not at the pump) year-to-date +36.9% as a sector. In the 2010s (2010 – 2019), the Energy sector experienced a “lost decade” as the industry struggled to generate an average positive return over this ten-year period. The S&P 500 energy sector registered a meager 6% gain this decade (Total, not annual return), compared with a more than 180% rise for the benchmark S&P 500 stock index2. This year, technology is one of the worst-performing sectors year-to-date (-18.7%) But, this sector was +377% over the same time period (2010 – 2019) and has mainly been responsible for some of the most significant gains since 2010. At year-end 2021, we were trimming back our growth exposure in favor of adding to more value companies (energy, financials, utilities, etc.). This was because growth companies outperformed, causing the allocation to drift higher than its intended target. Therefore, in this scenario, we trim from an asset that has outperformed and add to a fund or sector that has underperformed. This “buy low, sell high” strategy should be the ideal scenario for any investor.
The S&P 500 is (-12.92%) YTD which has caused us to give back some of the gains from the strong market and account performance in 2021. Despite the poor performance to start the year, we are trying to help our clients keep things in perspective, comparing where they are today (even with the recent market volatility) to where they were to begin 2019. Since January 4, 2019, the S&P 500 has been +63%. Most investors have made significant gains over the past three years. History has shown that the market is positive every 3 out of 4 years or about 75% of the time. This doesn’t necessarily mean the markets will end negative this year; while it is possible, it just means volatility is a normal part of being a successful long-term investor.
As I mentioned earlier, volatility creates opportunity. We are actively looking for tax-loss harvesting opportunities across both equities and fixed income. In brief, Tax Loss Harvesting allows us to sell a position at a loss and replace it with one that has similar return characteristics. Although “Tax Loss Harvesting” may sound bad, it allows us to take a proactive approach in volatile markets and is a useful tool for lowering taxes on future gains. We can’t control market volatility, but we can try to benefit from it. We will continue to evaluate our funds given market conditions and make adjustments as needed if we deem the change is in the best interest of our clients.
If you would like to discuss your long-term financial plan in greater detail or would value a review of your current investments, please contact our office to schedule time with your Wealth Advisors. If you are not currently a client and value a second opinion, we are here to help. Now is a better time than ever to look at your current investments and financial plan to make sure they are properly positioned for the unexpected.