Independent SEC Registered Investment Adviser at Stonnington Groupa wealth management and investment planning firm based in Pasadena, CA.
After more than a decade of substantial market growth following the global financial crisis, we are entering a new period of economic uncertainty.
According to research by FactSet, the S&P 500 showed appreciation from December 31, 2008 to December 31, 2021, with an annual return of nearly 16% including dividends. This rate exceeds the historical average of 10.7% of the index since its founding 65 years ago. Now inflation is at an all-time high and the Federal Reserve is raising interest rates again.
My own portfolios, and those of many of my clients, were largely invested in US equities during the recent economic boom. But now investors are understandably getting nervous about the future of the market.
Business leaders looking to invest for the future may have these pressing questions about their investment portfolios:
1. Is Buying Domestic Stocks Still a Good Strategy?
2. Do I need to adapt my investment strategy to the current economy?
2. Maybe, maybe not.
It is important for wealth advisors to remember that there is no single strategy that will work for every investor. Let’s look at more detailed answers to these questions.
Stocks are still a good long-term investment.
The case for investing in stocks is still strong. It makes sense to continue buying high-quality companies, as a buy-and-hold strategy typically pays off over time. If you can survive the ups and downs of the market, I believe your stock portfolio will deliver healthy returns over the long term.
Many of my team’s clients have had stock portfolios for decades and it would be disruptive for them to suddenly change their investment strategy based on recent events alone. They have seen growth since 2009 and they have learned to hold their portfolio comfortably during past recessions. They may consider changing their strategy when they retire or some other change in priorities or circumstances; otherwise, the best approach is to stick to the lesson.
The old maxim, “what doesn’t kill us, makes us stronger” also comes into play in a recessionary environment. It may seem counterintuitive, but buying stocks during a recession is a good idea because you are investing in the future recovery and may be buying at a discount to past prices. High-quality companies are more likely to survive an economic downturn, and they can use it as an opportunity to consolidate their business, buy competitors, and gain market share to get out of the recession without inflated costs.
Now is a good time to think about diversification.
Sticking to a buy-and-hold approach with a full equity portfolio may be the right strategy, but it’s not the only one. The case for diversification may be stronger now than in the past. While interest rates are high, now is a good time to consider diversified investments. For example, the strong dollar has made international investing more attractive. Commodities could cover inflation problems. And for those who can afford illiquidity for a long time, private equity has delivered high returns.
There are two main benefits to diversifying a portfolio:
1. It tends to make your portfolio less volatile.
Some assets will rise while others fall, and diversification calms this volatility. You also never know when you’re going to withdraw your money, whether it’s a period of economic growth or contraction. It is disruptive or potentially devastating for a wallet to withdraw money while it is at a low point; By diversifying your assets, your risk of extreme fluctuations is minimized.
2. It can make your portfolio more profitable.
Without a crystal ball, you don’t know what assets will appreciate in the future. By diversifying your portfolio, you can benefit from your investments in an asset class that is doing particularly well. Real estate, for example, showed an enormous appreciation in the past year. If you had real estate in your portfolio, you could have easily made strong returns even with a poor stock portfolio.
Your strategy should align with your goals.
Your investment strategy should be aligned with your individual goals and plans. If you are 35 years old and plan to work for another 30 years, you may be comfortable with a portfolio with higher risks but potentially higher rewards. If you plan to retire next year, you may be interested in a more stable, income-generating portfolio of high-dividend stocks.
Ask yourself the following questions when determining your investment strategy:
• What is your total investment timeline?
• What are your short and long term goals?
• What is your current risk tolerance?
• Can you withstand the volatility of stocks?
• Do you need a portfolio that generates income?
• What are your future capital needs?
Ultimately, the best investment strategy is the one that works for you. The economy will always go through ups and downs, and no investment strategy can guarantee profit or protect against loss. How you deal with these changes will depend on your personal circumstances and comfort level. The bottom line is this: stocks are a good place to invest for the long term, and you may also want to explore a more diversified portfolio and stable income streams.
The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice on your specific situation.