Josh Elmore CFP
As 2022 seems to be flying by, it’s important to obtain the appropriate perspective as we head toward the latter half of the year. As of today, the S&P 500 is down -9.47% YTD and another -2.9% at close of market today. On top of that, average 30-year mortgage rates have exploded 60% higher (avg. 30yr rate= 5%, up from 3% a year ago). Performance of most bond categories are also in the negative through the 1st quarter with interest rates expected to rise again in May. Global pressures such as the Russia/Ukraine conflict and supply chain issues also continue to impact markets this year.
Where should we focus amidst all these headwinds?
Well first, let's focus on the distinct rotation happening in the equity markets. The S&P 500 index is composed of both value and growth companies. The S&P value stock index is down only -5.8% YTD versus the S&P Growth index down -16.28% YTD. This rotation is a healthy one seeing as the markets are seemingly respecting valuation metrics such as profit, dividends, and earnings more than before. These changes are consistent with our management style at Plan Wealth Creative. Investors are steering clear of heavily allocated growth portfolios and moving toward more profitable companies offered at a lower valuation (S&P Growth Price/Earnings ratio = 29.94 versus S&P Value Index 15.53). In other words, value stocks are more than 40% less expensive to buy than growth stocks.
As changes unfold in the first half of this year, now is as good a time as ever to take a step back and take in some long-term market data.
A Healthy Forward-Looking Outlook
Downturns Vs Down Years
Our friends at Dimensional Funds Advisors (DFA) put out a great piece regarding intra-year downturns and corresponding calendar year equity returns. While the markets are pulling back, it’s important to note that 17 out of 20 years (85%), intra-year pullbacks led to positive returns.
A cursory glance at this piece immediately offers a critical reminder that investors need not get caught up in the short-term turmoil of markets.
Benefits of Long-Term Stock Investing
Again, DFA demonstrates the power of markets dating back more than 100 years. Though the recent market pull-back hasn’t put us into “bear market” territory, it’s important to remember that Bear markets only last an average of 10 months.
The Right Response
As financial headwinds mount, we don’t know if we’re headed for a bear market or if recent market performance is a healthy pull-back that will lead us to positive 2022 returns.
Plan Wealth Creative builds portfolios for clients for the long term. While rebalancing and short-term changes may be made to portfolios amidst intra-year changes, our focus is and will always be the power of long-term markets. When the markets experience a lot of change, particularly in a short amount of time, financial planning must remain the critical foundation to allocating portfolios. In other words, we shouldn’t allocate portfolios based on “feel” but on needs. We must account for spending needs in the immediate 12 months, 2 years, and 5 years respectively.
If a client comes to us and says, "I have an investment portfolio of $1.7 Million, how would you invest it?" They will never get an immediate answer from us other than, "according to our long term investment philosophy and your personal financial plan." A personal financial plan takes into consideration overall life goals, philanthropic goals, retirement income needs, and tax status of various investment accounts. How we might allocate a ROTH IRA that a client never plans on spending will certainly be different than a Traditional Retirement account that we plan to distribute over the client's lifetime for retirement income.
Risk and portfolio positioning continue to be top of mind throughout the rest of 2022 and into 2023. Plotting tax-efficient and risk-efficient distributions for clients also remain critical objectives for Plan Wealth Creative.
Headwinds Demand Changes to Planning Approach
As the market changes, so does our approach to managing risk. Simply put, we’re rethinking the 60/40 portfolio approach to risk management. While our focus for those close to retirement continues to be centered around building a strong and inflation-proof stream of income with a portion of our retirement nest egg, it’s hard to say just how much income we can yield from traditional bond investments given the concern of rising interest rates.
Bonds do still provide the critical function of providing a hedge for when equities experience a substantial market downturn, but we believe that, overall, bonds provide a losing risk vs reward ratio given the current economic landscape (bonds lose value as rates rise).
If retirement is less than a decade away, building a resilient retirement income strategy should be at the forefront of your financial planning needs. As we rethink the 60/40 stocks to bonds allocation, it begs the question, where else do we invest, if not in bonds. Are dividend stocks the right alternative? Should we look toward real estate? How much risk is too much risk heading toward retirement? How much of your income is guaranteed to you in retirement?
These are all personal planning-related questions that need to be addressed in the client-advisor relationship.
If you haven’t revisited your retirement income plan recently, now is a good time to examine, review, and adjust your plan moving forward.
Feel free to book a call here: Client Meeting Schedule.
Send email to Josh.Elmore@PlanWealthCreative.com for comments or questions relating to this blog post.
 Source: Morningstar Research https://www.morningstar.com/etfs/arcx/ivv/quote  Source: Forbes.com https://www.forbes.com/advisor/mortgages/mortgage-rates-04-19-22/  Source: Morningstar Research: https://www.morningstar.com/etfs/arcx/agg/quote
 Source: DFA Publicly Available Resources: Do Downturns Lead to Down Years?
 Source: DFA Publicly Available Resources: Bulls, Bears, and Long-Term Benefits of Stock Investing
 Source: Lincoln Financial: The Fixed Income Dilemma