Given market conditions, retirees can be forgiven if they feel that investing right now is akin to running with scissors.
Risks and uncertainties abound: spiking inflation, Federal Reserve rate hikes to combat rising prices, a war in Ukraine, supply-chain snafus, and more. Markets have dropped—and then tumbled further. The Dow Jones Industrial Average is down about 12% year to date, while the S&P 500 has fallen 17%, and the Nasdaq has tumbled 26% so far this year. The price of Bitcoin has been halved since its peak of about $69,000 in November.
“This is probably one of the few times, if ever, in someone’s investing life that either gold or fixed income isn’t a safety net,” says Dan Ludwin, president and founding partner at Salomon & Ludwin in Richmond, Va. He notes that the iShares Core U.S. Aggregate Bond ETF (AGG) is down about 11% year to date. “Normally people expect a little bit of a zig-zag in their portfolio, and it’s just zagging right now.”
But it’s not all doom and gloom, say financial advisors. Now may be a good opportunity to make small changes to a portfolio—and above all to remind oneself about the value of sound financial planning.
Jeremy Sharp, financial planner and founder of Redeem Wealth in Gilbert, Ariz., suggests investors consider rebalancing their portfolios if they haven’t already done so—taking profits in the rare holdings that are up and adding to beaten-down positions. “One of the custodians we use is Betterment. They do daily rebalancing,” Sharp says, adding it’s great for occasions such as these.
It may also be an advantageous time to buy the dip, provided investors don’t stretch themselves too thin, advisors warn. “Don’t try to just put cash in and hope it pans out in the next six months or so,” says Frank Pare, a financial planner and founder of PF Wealth Management Group in Oakland, Calif.
Salomon & Ludwin regularly takes some profits as the market rises in order to have dry powder to employ in downturns. On Monday, the S&P 500 fell to intraday levels 15% lower than its all-time high, triggering a buy signal for the firm. Ludwin says that means buying stock ETFs: large-cap, mid-cap, and small-cap U.S. funds, as well as developed and emerging international markets.
Advisors suggest retirees maintain enough cash or liquid assets to cover a year of living expenses. Some financial planners go further, suggesting clients have enough on hand to see them through two or more years Ludwin says his firm advises clients to keep two to three years of “lifestyle cash” on hand so that they can cover their needs in down markets without having to sell stocks. “What we always tell people is that the worst mistake you can make is being forced to sell into a declining market, because every dollar you sell in the market is a dollar that‘s never going to recover,” he says.
Pare says that if retirement investors have extra cash to invest—excluding what’s required to cover living expenses—then they could add to their investments, but he cautions them to “diversify, diversify, diversify.”
Value vs. Growth
Investors may also want to consider tilting part of their equity allocation toward value stocks, which over the past decade have lagged behind growth stocks.
“If you don’t have value in your portfolio, today is a sharp reminder of why you should think about getting some,” says Evelyn Zohlen, president of Inspired Financial in Huntington Beach, Calif. She says that research shows value investing can perform well over the long term, though that doesn’t mean investors should eschew growth entirely.
UBS financial advisor Michael Zinn says while his team has a tilt at the margins toward value stocks—some of which are “shockingly cheap”—a balanced approach is required given economic uncertainty.
“We think having a blend of high-quality tech, secular growth, makes sense because of that recessionary risk. But we also want to battle inflation with some commodity-driven but great value companies,” the New York-based advisor says says.
GenTrust has been adding some commodities exposure for clients who previously weren’t invested in real assets, says Javi Sanchez, an advisor at the Miami-based firm. As of May 1, a standard 60/40 portfolio was down about 12% year to date, while the same portfolio with a 5% allocation to commodities was down only about 9%, he says.
After Russia’s invasion of Ukraine, GenTrust anticipated a shift in energy away from fossil fuels, so it has been moving more toward clean-energy investments and uranium, which is used in nuclear power generation, Sanchez says. The firm also has a “little bit of a tilt” toward Norway, “as we felt countries were going to get rid of their dependency on Russia for energy,” he adds.
Investors may also want to carefully review their fixed-income investments in light of the changing interest-rate environment. Zohlen says she has been using Treasury Inflation-Protected Securities and I bonds in client portfolios, though they aren’t without their drawbacks.
I bonds earn interest based on combining a fixed rate and an inflation rate, but investors are limited to purchasing $10,000 worth of them each year. “That doesn’t necessarily make a dent for most client portfolios,” Zohlen says.
Investors could also look to short-term duration bonds. Greg Ghodsi, a financial advisor at Raymond James Financial, says his team has been “way overweight for one-year or under bonds for retiree clients” for several years, eschewing bonds with longer maturities.
“You may have a phenomenal opportunity as those bonds mature to reinvest at two or three times the yield of 60 days ago,” says Ghodsi, who is based in Tampa, Fla.
UBS’ Zinn says he uses utility stocks in conjunction with fixed income in client portfolios, adding that they can be an inflation defender because utilities typically raise their dividends each year. Plus, they are real assets, he says. “Debt is a paper asset that can be wasted away by inflation,” Zinn says.
Zinn says his team invests in individual utility stocks, and cautions that his approach requires due diligence and research, looking for companies that have good relationships with their regulators. “We’re interested in regulated utilities [that are] paying consistent dividends and raising those dividends 3% to 5% per year,” he says.
Although investors have been regularly asking Pare about cryptocurrencies, he hasn’t recommended they invest in what he sees as a speculative investment. Bitcoin’s dramatic fall in recent months, from about $67,000 in November to approximately $32,000 today, has only reinforced his skepticism.
“I think people can get the right returns without going that far out on the risk/reward spectrum,” says Pare, an advisor since 1996. “I wouldn’t tell people buy on the dip. That’s for sure.”
Those with an eye to history will note that while this year has so far been an eventful one for investors, markets have experienced worse. And all bear markets come to an end. To stay the course, it’s best to focus on what you can control, advisors say.
“Knowing your limitations and how much you can spend makes a big difference on whether you can meet your goals,” Sharp says.
Pare also suggests investors avoid paying too much attention to daily market swings. “It’s best to turn off the TV if you can,” he says.
Write to Andrew Welsch at email@example.com
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