FIVE THINGS YOU SHOULD KNOW
INSIGHTS for INVESTORS
This week’s “panic” was brought to you courtesy of those that apparently awoke from their slumber to realize that inflation has “arrived.” Of course, it arrived last summer, so I’m not sure where these experts have been all this time.
It’s set to be a beautiful weekend, and quite frankly this isn’t nearly as complicated as most people think so I’ll do my best to keep this brief.
A few items for your consideration:
A. Why the panic?
Peak to trough this week amounted to approximately a 4% decline. 4%!! And yet, to hear the press talk about it you’d think it was, once again, the beginning of the end. Keep in mind the chart below, which shows that drawdowns are very common (even nasty ones), and yet for all the “red dots” (low points for the year) very few turn into “gray bars” (total return for that calendar year). And of course, none of them are fatal.
B. The Real Threat from Inflation
If you are reading this it likely means you’re an investor and have worked hard enough and been blessed to have additional resources. For you, some inflation can actually be a positive and help push higher many types of investments.
The real victims of inflation are those living paycheck to paycheck, and those that run into cash/bonds that can’t keep pace with inflation.
That said, the key is to tilt into those sectors/assets that do well in inflationary environments and stay invested. What types of things tend to do better? Equities in general (at least most the time, see next chart), but specifically value stocks including materials, energy, industrial and other assets such as credit and real estate. This is how we’ve been positioning clients for some time.
What struggles? Gold and traditional bonds. Inflation pushes rates higher, and higher rates kill bonds and gold. If your advisor has had you shift into either in a significant fashion it’s time to find an advisor that knows what they are doing, and/or has the conviction to not just stick with what has
Here’s a great article if you’d like more on this topic
Courtesy of Hartford Funds
C. Keeping Perspective
No one likes volatility and the sense of losing money, in fact we are literally hard-wired to react to it the same we are mortal danger. And yet, it’s critical to remember that the true danger isn’t the volatility itself but the emotional reactions and panic decisions it leads many investors to take.
How do we overcome this physiological response to market turbulence? Planning and knowledge.
When you know the history demonstrated by the JPMorgan chart above, you can give yourself actual facts and not just classic investment cliches to hold on to when things get actually scary.
You also need a plan that focuses not so much on avoiding volatility (which isn’t really possible anyway) and rather empower you with the knowledge of how to navigate it. Consider the chart below, and ask yourself do you want to be the blue bar that, while not a volatile one, barely keeps up with inflation and therefore moves you no closer to your goals? Or if you knew how to make it through the “wiggles” of the other three bars, would you not love to experience the enhanced gains they can give over time?
What assets classes the bars represent isn’t important (thus I took them out) it’s defining what’s more important to reaching your goals or avoiding discomfort at the cost of not achieving them.
Remember the press and the pundits have far more interest in frightening you than they do helping you find your path.
Have a wonderful weekend,
Tim and the team at TEN Capital