Have you ever made a poor decision based on fear, only to learn of your mistake later?
Some of you are rolling your eyes knowingly, remembering that mistake, while I am sure some of you are saying what? I would never do that, or I am not afraid of anything.
One of the things I learned about helping people in water rescue is that, as painful as it may be, you must wait for a panicked person to drown before you can save them nearly. Their fear causes them to make poor decisions like grabbing their would-be rescuer and drowning them both!
I also learned that the more you understand something, the less afraid of it you are likely to be. Did you know that much of the fear we experience is simply because we fear the unknown? Have you ever waited for the outcome of a job interview and feared the worst? How about waiting for the college acceptance letter or the results of an important test?
Fear is powerful, but this month, let’s talk about understanding what is going on in the economy, why we are seeing what we are seeing, and three suggestions you may want to consider
This is not personal advice, but rather broad general information, and opinion.
- Cause & Effect (Understanding the justifiable fear.)
- Three suggestions
Cause & Effect: (Understanding the justifiable fear)
What are you afraid of? Inflation? Running out of money in retirement? Will there be a significant food shortage? Or maybe, How am I going to keep paying for groceries and gas as prices rise by another 30 or 50%?
Let’s start with “why” or the cause.
- In 2020 and 2021governments around the world created money without productive output from that money due to the pandemic.
- Buying up government bonds
- Lowering rates to near or, in some cases, below zero
- Depositing free money into individual accounts
- Special tax breaks and loans to individuals and businesses
Think of these actions as stepping hard on your car’s gas pedal.
- Towards the end of 2021 and into 2022, governments worldwide, particularly here in the United States, are not just pumping the proverbial brakes; they have erected a proverbial brick wall for all that momentum to run to a nearly immediate stop.
- ending the purchase of bonds and possibly even starting to sell bonds to soak up the money supply
- No more free deposits into individual or business accounts
- Relatively slight increases in the Federal Funds interest rate caused consumer interest rates to more than double in the first six months of 2022.
- A war begins in Europe.
- Immediately oil and gas supplies are cut in a big way.
- Many countries no longer use Russian energy supplies.
- Due to environmental concerns, a closed Keystone Pipeline means the U.S. cannot increase its traditional energy supply appreciably.
- Fear that Europe will enact a “windfall tax on oil companies, further disincentivizing energy companies to produce additional supply.
- Many temporary governmental incentives for utilizing new forms of alternative energy are running out and have not been extended.
- More slowly, grocery prices increase in anticipation of a food shortage as the planting season comes and goes with no planting in Ukraine (often called the breadbasket of Europe.)
- Further, the Russian forces systematically destroyed farm equipment limiting the ability of future planting and harvesting to take place.
- Drought in several vital states this past summer caused a poor harvest. As feed became more expensive, more livestock was processed, keeping protein prices from moving even higher in the short term while increasing the likelihood of much lower supplies and much higher prices longer term.
- The U.S. continues its policy of disincentivizing agriculture production.
- Supply chain issues and shifting demands of the new “stay at home” workforce, combined with a severe shift to the downside for new home starts due to higher interest rates, have caused an inventory glut for major retailers.
- A lack of clear direction from the Federal Open Market Committee (FOMC) and Washington is beginning to cause cash hoarding by consumers and businesses alike.
Wow! That was a long list, and it was not all-inclusive of the issues. Hopefully, it explains, for better or worse, the cause or “why” things are happening.
As we can all see at the gas pumps, grocery stores, and when rental agreements need to be re-signed, prices are significantly higher (like 30% to 40% higher) without the same increase in wages. Credit card usage and delinquencies have already started to rise, and the consumer (which makes up about 2/3rds of the economy in the U.S.) is pulling back quickly as fear sets into their hearts and minds.
As this happens, nearly all assets are correlated and have moved lower. Old, outdated portfolio management does not fare well in such an environment. Fearful investors move into cash, both locking in current losses and accepting the idea that their cash holdings are also depreciating at what may be a double-digit pace.
Lest I seem like Mr. Doom and Gloom, it is also important to point out that every bear market in U.S. history has turned into a bigger, more prolonged bull market. About once every two years (March of 2020 was the last one), we experience these downward moves. Each one is caused by something a little different and has different characteristics but similar outcomes.
If this pattern ever changes, we will have much bigger problems as that will be the moment when capitalism has died, and our portfolios will matter very little. I do not see that happening in my lifetime.
While it may be prudent to make asset allocation adjustments in bear markets, we firmly believe that these are the best times to invest in quality companies at what are often very reasonable prices.
Many of you will likely remember that not all that long ago; oil prices were such that buyers were being paid to take the oil rather than pay for it.
That was the time to invest in oil which at the time of this writing is at $117 per barrel. I believe the same is true now for many businesses that have experienced sharp drops in their stock price.
Aside from the often-unhelpful mantra of “don’t sell” or the new phrases such as “strong hands” or “diamond hands,” let’s be practical. Let’s do the analysis. Some of those companies need to be sold while others represent amazing buying opportunities. If you are not sure exactly how to do that analysis or, like most, simply don’t have the time or inclination to do so that is why we do what we do. Just reach out, we actually like doing it.
Suggestion number one – Readjust, reallocate, do your research, or place that responsibility with a trusted, forward-thinking, independent, fiduciary advisor with the right experience.
You have a plan for a reason, revisit that plan and decide if consistency is crucial and if rebalancing into underperforming assets is suitable for you. Are the businesses you invested in still solid companies but may take longer to recover? Then sell for now and allocate into higher conviction enterprises keeping in mind any tax consequences. If you don’t have a plan, you need one, especially for times like we are experiencing now.
Suggestion number two – If your investment horizon is long, consider this market’s opportunity. Many quality businesses are selling at bargain-basement prices. While it is difficult psychologically to buy when the market is in a downward trend, these are often the times when fortunes are made.
Suggestion number three – While we often state that taxes are a thing, not the only thing, now may be an excellent opportunity to roll assets from traditional retirement accounts into ROTH accounts. Further, you may want to take long-term tax losses by selling investments and finding a similar business to replace them. Just as important, do not be afraid to take your gains on a company whose prospects do not look as good in this changing business environment. It can be better to pay the tax than to see your gains evaporate by more than the tax you would have paid.
“Define your outcome and allow a skillful artisan to help create it for you.”
Nothing in this communication should be construed as personal advice, and past performance is no guarantee of future results. Investing is not appropriate for everyone. There is a risk of loss associated with investing in the markets. No representation or implication is being made that using any methodology or system will generate profits or ensure freedom from losses. Guardian Rock LLC and its affiliates are fiduciary investment advisors. Please consult with Guardian Rock or another experienced investment advisor Guardian Rock before making investment decisions and trying to implement the strategies and tactics we discuss in any of our publications.