It was another tough day that seemed to be a string of tough weeks for the stock market and most investable asset classes. The Dow Jones Industrial Average closed down 876 points, or 2.79% today, while the S&P 500 closed 151 points lower, or 3.88%, while the NASDAQ added the cherry on top with a decline of 530 points or 4.68%. Following a Friday selloff that lost just about as much as we did today. The Dow is down more than 600 points in each of the last three trading sessions.
Asset Class Declines
In addition, it is not just stocks that are cratering. This year is peppered with declines in just about every asset class. Here is a brief synopsis of assets class declines from their all-time highs (most hit all-time highs in November 2021):
- S&P 500: -22%
- Nasdaq: -33%
- 2-year Treasury Bonds: -4.8%
- Total Bond Index: -15%
- Gold: -12%
- Bitcoin: -66%
- Ethereum: -74%
There are not many places to hide except within commodities; they’re up more than 40% this year because of oil and commodity prices, mainly due to the war in Ukraine.
Although times like these are scary, I cannot say they were unexpected. We have been leaning our portfolios towards a conservative biased for about a year. As most of you know, this hurt performance in 2021 while this market, tech, and crypto bubble were forming, but have well paid off through the aggressive selloff of 2022.
However, even conservative portfolios have been more volatile than usual due to the declines in bonds and gold. Although our portfolios are experiencing far less volatility than the market and even their benchmarks, they are not immune to the recent swings as all asset classes move in lockstep.
This market environment is difficult for any battle-hardened investment professional, let alone the average investor. What is our strategy? Good question, and as this is something we have discussed here regarding your financial plan. As we watch the market correct, the method we formulated is:
Step 1: Do nothing. The portfolios are currently in a protective allocation and as the market falls, this protective allocation will cushion the blow. We do not think that 33% in the Nasdaq and 22% in the S&P 500 is enough of a decline to get aggressive based on current valuations. However, we will continue to reinvest dividends, interest, and additional cash during panicky selloffs like today.
Step 2: Rebalance and Call for Cash: When we feel that the market has reached levels where the prices are compelling, we will look to rebalance. This will include buying more stocks while prices are cheap. In addition, we will get a market email update out to you calling for additional cash if you have a surplus in your savings and emergency reserve. This is typically only something we do when fear has taken over an emotional market and the values are compelling.
Step 3: Roth Conversion: As we have been doing the last several years at the tail end of each year, we will frontload our Roth conversion calculations to try to move more IRA assets to Roth while valuations are extremely low, and the tax liability is a minimum. Thus, when the market recovers, all the recovery gains will be tax-free.
This outline is the three-step approach that Bill, Lauren, and I will be talking through with you as we wait out the current bear market. As we discussed in the opening letter in our new year review, written the first week of January, a sell-off is expected when market valuations get as stretched as they currently were in 2021, but exactly when and how it will occur is a mystery. Attempting to time this information is not our job or a part of our skill set. A sailor does not earn her living by trying to guess the direction of the future wind. A sailor’s job is to sail to their destination regardless of the wind, adjusting the sail as the environment dictates. Our job is the same.
You will reach your destination of a comfortable retirement regardless of short-term market volatility. We will keep your boat afloat, even in the worst of storms. You will occasionally be blown temporarily off course, but we will adjust our sails to catch the wind and progress towards your destination.
The best advice is to ignore them. Turn off CNBC. Log into your Schwab account. You will get the long-term returns we expect. Avoid the short-term fear, and the long-term will take care of itself.
Please do not hesitate to contact Lauren, Bill, or me if you want to discuss your particular situation. We are here if you want to discuss your account, the market, or your financial plan, and we are available at the office or on our cell phones. As always, thank you for the faith that you have placed in Zynergy.