2023 Inflation rises! How to prepare your investments for any market.

Is inflation receding?

Did the Fed pull off a “soft landing”?

What do the current numbers mean for your investments?

The answers to these three questions could have a major impact on your life.

 

Many times my clients say “I think the market is going to go up/down so we should put money into risky/safe investments.”

The problem with this is, if you are wrong, it is going to cost you a lot.  It will cost you a lot in loss, or in missed gain, but there is an actual way you can invest and be right 100% of the time.

 

Covid has been strange in a lot of ways.

From Feb 14, 2020 to March 20, 2020 the S&P 500 lost almost 32%.  People who thought they were going to retire on Feb 15th woke up and had to pull their retirement papers from HR.

But, by August 7th, the market had fully recovered!

 

An important mathematical lesson here, it takes a 42% gain to recover from a 30% loss.  Math sucks that way.  Also why I focus with my clients on minimizing loss without giving up gain.

 

In the lunacy that followed the market “bottoming” (by the way, there is no rule that says it can’t go back down) on March 20, 2020 the market doubled and peaked as the ball dropped closing out December 2021.

Something important happened during this time.  The US Government passed the American Rescue Plan and in March 2021 pumped 1.9 trillion into the economy.

Dear reader, tell me if you notice something on this chart of monthly inflation.  The first two major spending bills (along with many other smaller bills that added almost double these amounts) in response to COVID pumped the economy full of loose cash.

In response the fed began raising interest rates in March 2022.  From that point on the S&P500  dropped about 22%.

So here is the cycle.

Pump Money –>Inflation–>Fed Tighten–>Market Decline

In August of 2022 the “Inflation Reduction Act” was signed into law.  This bill pumped about 740 billion more into the economy.  That was approximately 5 months ago.

The January inflation numbers were just released and, at a time when the Fed is slowing its tightening the CPI actually increased .5%.  So we have the first two ingredients for another major downturn.

So, while the market is off its lows (again, with no rule that says they were actually the “lows”) and people are feeling better about their investment accounts there is only one question that matters.

Are your accounts prepared for another market decline?

In my practice I tell my clients that financial planning in this country is lazy and relies on completely contradictory thinking.

I myself get caught in the same trap.  Very intelligent people hold these two thoughts in their mind:

  1. Past performance is no guarantee of future results.
  2. “In the long run the market always recovers” or “The market will return an average of x%”.

Will the market most likely recover and make new highs?  Probably.  We hope it will.  But I just asked a client retiring from Boeing if we should arrange his money so that we “hope” he can remain retired.  He did not like that at all.

The goal is to build a portfolio that doesn’t rely on “being right”  about where the market is going next.

Especially with those near and in retirement the goal is to construct a portfolio that

Add additional reward with no additional risk.

I often get the question on whether there is any real difference in performance over time with different investment advisors.

The easy thing for me to do (and the smarter business decision) would be to sound like 95% of the rest of the industry and say “oh yeah, based on the power of our institutional research we are able to obtain XYZ rate of return.”  Or, when a correction comes tell them “don’t try and catch a falling knife, the market always comes back, we should be able to average 7% rate of return.”

But

  1. I am not like everyone else.
  2. I tend to think you shouldn’t lie to people.
  3. I believe money is to important too the people who worked hard for it to do things the easy way when my clients deserve to have their money stewarded in a provably better way.

Without getting into a fight over single stock portfolios (something like 98% of hedge funds underperform the S&P 500, so an advisor has an awful lofty sense of their abilities if they think they are going to “beat the market.”) there is one mathematically provable way to make better risk adjusted returns than a standard buy and hold portfolio.

Add more reward without adding more risk, so that you can flourish in any market condition.  Market up, cool, making money.  Market down, no big deal, sleep well.

The truth is that there is one provable way to have more financial peace of mind.  By adding in even a small amount of extra gains, without adding more downside risk, your overall portfolio (and how you sleep at night) will be less volatile and more profitable.

Note, I think sleeping better > having more money in the bank.

For the easiest example lets look at something everyone is familiar with: cash.

I frequently come across people with 100s of 1000s of dollars in a savings account.  The money is there for one reason.  The cannot lose that money.  Either for monetary or emotional reasons.

So, I ask them, “what if there was an account with the same guarantee of no loss, but you could make up to 10% if the market goes up.”

That is how to bend the R/R.

In an investment portfolio it looks more like replacing the worn-out “60/40” stocks/bonds with 60/40 stocks/higher returning safe money.

Bonds used to be a great hedge, and run counter to stocks.  Nowadays typical advisors use bond funds not actual bonds.  And those bond funds lost about 20% of their value along with everything else in the last couple crashes….terrible for investors.  Even if you purchase an actual bond, it can still lose its value if rates rise and you have to (or want to, in order to buy a new bond) sell it at a discount.

I just had a client who was considering me or a large RIA firm ask me “if these solutions are out there, why isn’t everyone doing it?”

Simple

  1. Often these investments are offered by third parties, and advisors don’t want to give up assets they can charge a fee on.
  2. When you give a big box firm your money, you get put in their “proprietary portfolio based on our big institutional research.”  That is code for what is essentially a target date fund built to keep them from getting sued.
  3. Lack of freedom or knowledge. When I was a retail investor I didn’t know about 50% of places I could put money.  The places the real wealth in this country go.  Most advisors get hired, learn one thing and stick with it.

Put into action it looks something like this.

That’s it.  Easy.  Same portfolio but using tools that remove the necessity of being right and trying to time the market.

These investments, investments that minimize or eliminate loss, while keeping double digits upside exist, and they are the key to an increased balance sheet and the peace of mind that comes with it.