In the Money Insight: Your Questions Answered
At Falcon Wealth Advisors, we recently hosted a stock market Q&A webinar that featured a number of thoughtful and important questions from attendees. I think it’s likely that others who didn’t attend the webinar may have similar questions, so I would like to answer some of them in this blog post.
Question: Can you provide some context around what’s going on in the market?
Answer: It’s been a volatile year for the market. One key factor is rising interest rates. These higher interest rates are for the purpose of cooling off inflation, but they have impacted both the stock market and overall economy. It remains to be seen if raising rates will bring down inflation, but that’s what the Federal Reserve is pursuing.
Another factor is the war in Ukraine. It’s a horrible humanitarian crisis and it has also contributed to inflation. And the COVID-19 pandemic is still creating economic disruptions, especially in China, as they pursue their ‘Zero Covid’ policy. Their importance to the global supply chain has only exasperated inflation issues. All these factors have contributed to the market’s performance. And while these situations may not be normal, the market volatility we’re experiencing is. It’s part of being an investor.
Question: I’ve heard you say this is a good time to buy stocks because prices are low. Does this mean I should become more aggressive in my investments?
Answer: This is a great question. We know we want to buy low and sell high. The answer to this question is: It depends. And what it depends on is if your goals have changed. We are generally not in favor of changing your portfolio’s allocation because of market conditions. But if you’re in a position to become more aggressive—and your financial plan supports that—a down market is a great time to do so.
At Falcon Wealth Advisors, as cash from bond interest and stock dividends build up in our clients’ portfolios, we take that money and reinvest it. This strategy allows us to hopefully buy stocks at a relatively low point in the current market environment.
On a related note, if you have some extra cash on hand, now may be an opportune time to invest it in the stock market, as you could buy stocks ‘on sale.’
Question: Given the complexity of the stock and bond markets, do you have recommendations for someone who recently retired and is managing their portfolio?
Answer: First and foremost, I would say not to take this downturn personally. The market didn’t wait for you to retire to decline. It’s just the way it worked out.
It’s understandable that you may feel anxiety if you recently retired and have seen the value of your portfolio decrease. But this is why it’s important to construct your portfolio properly in advance of retirement. At Falcon Wealth Advisors, we help our clients set up their portfolios so they know they can take distributions and live off their money regardless of market conditions.
It’s also critical to regularly review your financial plan. We know the market will have down periods and we plan accordingly for our clients. Most of our clients have a target rate of return of 6-8%, but it’s difficult to hit that year in and year out. In the last three years, many of our clients saw returns well above that number. This year, many are experiencing negative returns—which has brought their portfolio back in line with its long-term target rate of return. It would be great if the markets provided those returns consistently, year in and year out, but that’s not how it works.
And with bonds being down in value, it’s important to understand when the bonds in your portfolio will mature; how much principal will be returned to you; the interest rates they’re paying you; and how much more interest you can earn once your bonds mature, and you reinvest their principal. If you don’t need to sell a bond when it’s down in value, we know its principal will be returned to you and when, which is why we’re not fretting about the value of bonds in any client’s portfolio.
Question: When would Falcon Wealth Advisors ‘rip the band aid” and sell a stock when it’s down in value?
Answer: Falcon Wealth Advisors Founder and CEO Jake Falcon, CRPC®, along with myself and our Research and Trading Group, meet weekly to review the entire portfolio (though we individually track the portfolio’s performance daily). If a company is not performing to our expectations, we put it on our ‘watch list.’ And we look for reasons a company may not be performing—do they have a new CEO? Has its market changed? Has the management team swung and missed in executing strategy coming out of the pandemic?
We don’t want to sell a stock when it’s down, but if something fundamental with the company has changed, we will not hesitate to cut our losses and move on. And for clients who have taxable accounts, this could help them offset some of the taxes they have to pay on gains.
Question: Why should an investor own a bond fund, and should they exit the fund if they own one?
Answer: If someone is working, a bond fund is usually the only way they are going to gain exposure to the bond market in their company’s 401(k) plan.
Regarding what you should do if you own a bond fund, it’s important to know the relationship between bond values and interest rates. As interest rates rise, the value of a bond decreases—a vice versa. As previously mentioned, if you’re invested in individual bonds, you will receive your principal back after a predetermined amount of time and then have the option of reinvesting it in bonds that are yielding even more interest (bonds typically offer higher yields as interest rates rise).
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If you’re invested in a bond fund, however, you don’t own any principal. You own shares of a fund that are managed by a money manager who is buying and selling bonds. Lots of other investors are also invested in the fund. The challenge with a bond fund is there is no set date when your principal will be returned to you.
And if those other investors in the fund are selling their shares, this means the money manager must sell bonds inside the fund. If that’s happening right now, they’re likely selling bonds at a loss. So, the behavior of other investors in a bond fund can directly impact your investment. This is why we prefer individual bonds at Falcon Wealth Advisors. If you own a bond fund, please feel free to contact us. We can help you explore your options.
Question: When do we think the market will start to turn around?
Answer: I wish I knew definitively. But there are several technical indicators we examine regularly. The first is something called credit spreads, which show how much more interest you can earn in a corporate bond than a US Treasury bond with a similar maturity date. Because the latter is considered a risk-free investment, and because there is more risk associated with corporate bonds, credit spreads can provide some interesting insights into the market. During volatile times like this, we see the credit spread widen, as corporate bonds must pay higher interest to attract investors. Widening credit spreads often accompany volatility in equity markets and tightening spreads tend to be more indicative of a bullish/risk-on environment.
We also look put/call ratios. Puts and calls are both types of stock options (derivatives), and when someone is buying calls, they’re generally bullish about the underlying investment the option is tied to. If they’re buying puts, they are essentially betting against the underlying investment, or they have a bearish stance on it. When the stock market appears poised to enter a bear environment, we will see investors buy more puts than calls, as they try to protect their portfolios. In moments of peak fear, P/C ratios tend to spike which have coincided with more durable market bottoms in years past.
These and other technical indicators can provide insight into where the market is and where it may be headed. Still, as we often caution, no one can predict the future and we don’t make decisions based on these indicators alone. If you’re interested in these technical indicators, please know I enjoy talking about them. Feel free to contact me if you want to learn more.
Question: Will the stock market recover as quickly as it did from the 2020 crash and how are we mitigating risk at Falcon Wealth Advisors?
Answer: The market experienced a 30% crash in 2020 at the onset of Covid, before rallying to finish up very positively on the year. This was a historical outlier; a full market recovery usually does not happen this quickly.
Dating back to World War II, there have been 24 stock market corrections—defined as a drop of 10% or more—with the average correction being 14.3% and lasting 133 days. Those numbers are right in line with what we’re experiencing now, and this correction is not out of the ordinary. While what we’re experiencing isn’t pleasant, it is normal.
Of those 24 corrections, 12 of the times the market still managed to close positive on the year. History tells us that a market correction doesn’t necessarily guarantee it will be a negative year or that the market will drop another 15-20%.
With all of that in mind, I think inflation could be here for a while and will continue to impact the stock market and overall economy. I don’t think it will be as dramatic as it has been lately, but inflation will likely be a factor for years to come. At Falcon Wealth Advisors, we’re choosing individual stocks that we believe are poised to do well in an inflationary environment.
Question: Is it a good time to buy or sell a house?
Answer: It certainly seems like a good time to sell a house, as prices are rising—but if you must go and buy something else, things even out a bit. At Falcon Wealth Advisors, we encourage clients to view a house not as an investment but as somewhere to live and make memories. It can be both an asset and a liability. If you weren’t planning to sell your house, I wouldn’t hurry up to do so just because of market conditions.
If you would like to learn more about our investment philosophy and how we are navigating this period of volatility, please contact Falcon Wealth Advisors today. You can reach me directly at Cory@falconwealthadvisors.com.
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