Shelters for the shopping storm

Performance – editing: George D. Pavlopoulos

Individual investors need a new manual – or perhaps a revised version of the old one. The stock rally came to an abrupt end on June 13, when the S & P500 slipped into a bear market, ground at least 20% lower than its most recent high.

The few shares of huge capitalization technology that served as fuel for the wider market have fallen much further in 2022, with Meta Platforms losing more than 50%, Amazon.com 39% and Microsoft, Apple, Alphabet losing about 25% of their value. The Nasdaq index has been falling since March and has fallen 32% from its 2021 high.

If one has been investing steadily for years in a diversified portfolio, there is no need to panic. The best solution in a bear market may be to maintain its plan. If he continues to invest a portion of his monthly earnings, at least now he is buying shares cheaper.

The first question is whether one is overly dependent on a single industry or group of stocks. The last few years have been remarkable for how much investors have invested in technology stocks. Even after the big dive, the S & P500’s top five tech stocks account for more than 20% of the index’s weighted capitalization.

If one still holds large capital in technology stocks, one may not sell aggressively, just make them less dominant in one’s portfolio. Looking to the future, you can apply the same logic to industries that thrive today. Energy stocks in the S & P500 have returned more than 50% this year. Although there is a case of “deep” value stocks such as those still having upward prospects, increasing exposure to any stock requires tremendous attention.

Bonds

One way to manage long-term uncertainty and shield yourself from high volatility is to abandon “all or nothing” moves. If someone sells half their stake in something, it can be genius if the market recovers because they did not sell everything. If the fall continues, it has protected half of its capital from further contraction.

Portfolio diversification is more important than ever. A combination of stocks and bonds still provides significant “ballast”. However, bonds also lose value. Rising inflation and interest rates are a bad combination for their prices, with the Bloomberg index for US government bonds falling more than 10% in 2022, about half against shares.

For investors holding equity bonds directly rather than in equity, the pain can be alleviated if they simply ignore the current losses. While part of their bond portfolio is shrinking in value, they have a contractual agreement with the issuer and will receive the full face value of the bond. In other words, they will receive the interest they expect, as well as their total capital at the maturity of the bond.

Investors in bond funds see the current losses more clearly, because the fall in prices is reflected in the return on their mutual capital. The good news is that while bond prices in portfolios are falling, their yields are finally rising. This strengthens the argument in favor of bonds as a vehicle for investment diversification.

One type of fixed income investment that offers a particularly strong hedge against inflation is the US Treasury Series I savings bonds. 9.6% – hard to find in these times. The rate moves parallel to that of inflation and is redefined every six months. However, there is a limit to how much one can buy each year.

Solutions

Other assets that can add diversification include real estate investment trusts as well as equities and bonds outside the US. None of them, however, has escaped the 2022 loss cycle. However, they are improving the prospects for good opportunities today and normalizing returns in the future.

One category of assets that was considered a possible hedging factor was cryptocurrencies. The reality turned out to be quite different, as they are traded much more as a speculative bet than as safe havens. Bitcoin has fallen 65% from its November high, while Ethereum is down 73%.

What about using cash? Probably not a good idea – it’s just very difficult for most people to guess when the markets will turn around. For those approaching retirement, however, having enough cash is a smart move. Recovering from losses is much more difficult than for a younger investor, and a wrong move can permanently damage the savings needed for old age.

A prudent investment logic is to have in cash what you need for the next 3-6 months (12 for retirees).

A simpler solution is high-yield savings accounts, where returns begin to increase. Goldman Sachs retailer Marcus recently boosted its annual yield to 0.85%, while Barclays and Ally Bank offer similar interest rates on high-yield savings options. Money market funds are another solution, with interest rates rising rapidly when benchmark interest rates rise.