Tumultuous times call for consideration of all options
The extraordinary convergence of surging inflation, rising interest rates, increased market volatility, a looming recession and rising geopolitical tensions have created a perfect storm for investors. It leaves investors wondering when it will all be over, or whether the worst is still to come.
Paralyzed by uncertainty, many investors are scurrying to the sidelines hoping to avoid further losses. However, in this environment, leaving your money in cash could be one of the worst things you can do. What investment options should investors be considering during these tumultuous times?
Why cash isn’t an ideal option
It’s a natural instinct to want to move money into cash when things change. However, with inflation at the highest level in 40 years, parking money in savings or CDs yielding between 0.5% and 2% is the surest way to lose money. While it’s essential to set aside a sufficient amount of cash for emergencies (six to 12 months of living expenses), anything beyond that can hurt your long-term investment performance.
Diversification is still key to minimize risk
Diversification has always been critical to long-term investment performance. Mixing securities and assets with low correlation to one another ensures that your entire portfolio doesn’t move in one direction. Some industry sectors perform better than others during rising inflation. Some assets are less susceptible to inflation than stocks. But because it’s impossible to know which investments will outperform others at any given time, diversification ensures your portfolio will capture gains whenever and wherever they occur.
Time to rethink bonds
After more than 30 years of rising prices, the long bull market in bonds has ended. Rising interest rates are depressing bonds, which, along with stocks, are generating negative returns in 2022. Bonds have historically performed well when stocks have not. That’s not the case this year, and maybe for some time to come, which means instead of providing a counterweight to stocks, they are a drag on portfolio returns.
If you still want exposure to fixed-income investments, you may be better off with Treasury Inflation-Protected Securities (TIPS) or floating-rate bonds with short-term durations. Another alternative is the government-backed iBond, with its inflation-sensitive yield now sitting at 9.62%.
Look to high-quality stocks
Historically, the performance of stocks tends to be mixed in an inflationary environment. Companies with high debt and low profit margins tend to underperform, while companies with low or no debt and higher gross margins can still generate strong cash flows. Look for high-quality companies with strong global brands and competitive market positions that are able to increase prices without hurting demand. In addition, many high-quality companies pay dividends which can help offset inflationary pressures on your portfolio.
Commodities and real assets
Historically, commodities and real estate values have kept pace with inflation. Investors can easily participate in commodities by investing in exchange-traded funds, such as the SPDR Gold Trust or the Energy Select Sector SPDR fund. Both these funds are up for the year.
If you don’t want to invest in real property, you can participate in the real estate market through real estate investment trusts (REITs). Most REITs are required to return up to 90% of their earnings to shareholders as dividends.
Since its inception, the stock market has experienced world wars, the Great Depression, multiple recessions, record high inflation, major global conflicts and terrorist attacks. Still, it has never ceased its relentless climb to new heights. For every bear market, a more enduring bull market has followed. Historically, the stock market has always rewarded patient investors with a long-term time horizon.
Whether you are considering other investment options or looking to ride this market out, discussing your concerns and objectives with a financial advisor before making any moves is recommended.
Looking for a financial advisor? Alpine Bank has a wealth management division.
Products of our Wealth Management service are not FDIC insured, may lose value and are not bank guaranteed.