By Dan Weiskopf, ETF Professor

Stressed about your Finances and Portfolio Strategy?

These days, there is a great deal of negative sentiment shaking confidence in markets. Near-term headlines overwhelmingly highlight rising risks and lack a tone of confidence in the future.

  • Are we in a “Bear Market?” When did we enter it?
  • Interest rates are going to rip higher and crush bonds.
  • Inflation at 7.5% will permanently erode our standard of living.
  • War between Russia/Ukraine and China/Taiwan.

All this noise is evidence-based, and to some investors, concerning. Moreover, it is not aligned with most investor experience because the overhang sets a tone for a head-on collision.

Perhaps the answer to finding “Zen” in your outlook is to walk through a planning session with your financial advisor or compartmentalize your financial circumstances. Do you have investments in buckets? Alternatively, you can simply raise cash in an incremental fashion, followed by a plan to get back in as you find more measured Beta. Action sometimes feels like control.

Breaking Down the Structural Problem

Ironically, forecasting a “Black Swan” is a contradiction in terms, and mostly (in my judgement only), an effort to look smart. Deal with what you can control. If you are nervous about the markets, address the first structural problem.

  • First problem: is a decline of 10-20%, 30-40% in the markets going to be an opportunity, a life changer for you, or just a bad moment in time? Obviously, some of the answer here is measured in terms of how close you are to retirement. Putting the first problem into context can help with the second layer problem.
  • Does income from your investment portfolio drive your income? If portfolio income is in fact a primary driver for your lifestyle, look at your expenses! Find the equilibrium between income and expenses early on. Everyone wants more income, but in a world where costs are going higher, determine your variable costs and your fixed costs. What is needed and what is desired? We speak to financial advisors all day long who deal with planning issues, investment portfolio strategy and client goals. A little tough client love is not a bad thing right now. Tell your clients there are no easy answers and taking on more market risk is clearly not an option when circumstances are changing. As the saying goes, markets do not do well climbing a wall of worry, so wait for clarity.
  • Cash or rainy-day money.

Answer: It may be a surprise to some, but it seems that burning money by holding cash is a recent trend. According to the Office of Financial Research, money market funds are at comparatively high levels, similar to Covid peaks.

image02-Feb-23-2022-02-21-17-06-PM

Cash is an asset class that may be a guarantee negative return right now, but its calculus is clear (negative 5-7% vs inflation). If you were conservative in 2021, your return stream may already reflect a hefty cash balance. If you were aggressive before, with lots of market Beta, cash will help even more. Cash, as an asset class, is a balancing solution that provides peace of mind in volatility. To be clear, while providing a guaranteed long-term loss of capital, even such a loss is quantifiable. Note that as the Co-PM of BLOK, my eyes are open to this statement, drawing the ire of questions around Bitcoin being a store of value over cash. My answer: I am neither a trader nor a maximalist. Market volatility can lead to bad decisions, so any extreme position should be minimized.

Conclusion: Nervous? Take Incremental Steps

Beta measured volatility in up-markets is exciting and rewarding. However, in a volatile or weak market, people may want to access their financial situation. Our “structure matters” message may be boring, but people’s quality of life can be impacted by their financial pressures. It can be challenging to have a clear head in certain periods of time. Compartmentalizing your near-term cash burn and your long-term portfolio buckets can help stabilize stress. Such a plan also helps investors know they have control over the problem. Remember the good news: in most circumstances, these recent bull markets have probably led to investors meeting goals earlier than traditional assumptions. Last comment: do not make extreme decisions based upon nervousness. Feelings are not an investment strategy or foundation for an investment plan.

Footnotes and Interesting Tidbits

All this negativity may be driven by media viewership being down by 30-40%. https://deadline.com/2021/12/cable-news-ratings-2021-fox-cnn-1234899789/

Goldman Sachs highlighted cash was building in Q4. https://www.cnbc.com/2021/12/16/big-wealth-investors-are-likely-to-put-money-to-work-in-stocks-after-amassing-record-levels-of-cash.html

What is a Black Swan https://tradebrains.in/black-swans-investing/

Originally posted by Toroso Investments on February 23, 2022.

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Topics: Weekly ResearchStructure Matters