What To Do Now?

Bill Parrott |

What a crazy week! Last week I was at Wind River Ranch in Colorado with a few mighty men from my church, helping the ranch hands prepare for the summer season. Shortly, the ranch will welcome hundreds of horses and thousands of guests. We shoveled snow, oiled saddles, dug holes, mended fences, moved furniture, cleaned signs, greased bearings, cut logs, and trimmed trees. Ranch work is hard, especially for a city slicker like me who rides a desk for a living.

Working in the Rocky Mountains is exhilarating and challenging. In addition to the elements, we worked near cows and horses and saw moose, elk, eagles, and rabbits. It was a wild week in the mountains, and it was also a rough week on Wall Street.

Last week, the markets were volatile as investors reacted to the Fed’s rate hike and comments. The Federal Reserve raised its primary interest rate by one-half percent or fifty basis points, its second hike this year. The market soared 3% Wednesday but fell 3.5% on Thursday. Despite the volatility, the S&P 500 finished down a measly 0.21%.

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It’s a challenging year for investors as most asset classes are trading in negative territory. Stocks, bonds, and real estate holdings are down double digits, and there is no end in sight as to when the carnage will end. Investors continue to fret over inflation, rising interest rates, and Ukraine, and, as a result, they’re selling securities and moving their funds to cash.

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As markets continue to tumble, what should you do now? Here are four suggestions to help you manage your investments.

  1. Sell all your investments and ride out the storm from the safety of your savings account or money market fund. Transferring your assets to cash will preserve your capital and bring you peace. You can wait on the sidelines and watch others worry about declining stock prices and falling asset values. In the short term, you will look smart as others lose money. However, how long will the storm last? Days? Weeks? Months? Years? No one knows. And when the storm passes, stocks and bonds will return to their winning ways. When they start to climb again, will you be wise enough to get back in the market? When you decide to liquidate your holdings, you must be right twice – when you sell and buy. During the COVID correction, the S&P 500 fell 30% in thirty days. It was a bloodbath, as investors sold stocks for fear of entering another bear market or recession, but the market soon recovered, and by the end of the year, it had gained 16.3%. In addition, the S&P 500 soared 26.9% in 2021. If you sold during the panic and failed to buy back your holdings, you missed a 48% gain!
  2. Buy US government-guaranteed bonds If you’re worried about losing your principal. They’re currently yielding more than 3% interest. The 5-year Treasury Note now offers a yield of 3.06%, while the 20-year Treasury Bond pays 3.4%.[1] The rates are guaranteed if you hold them to maturity. If you buy these bonds, you don’t need to worry about market fluctuations because you’ll receive a constant income stream and a guaranteed return on your principal. For every $10,000 you invest, you’ll receive approximately $300 per year. Guaranteed income sounds nice until you factor in inflation and taxes. Since 1914, inflation has averaged 3.24%, so your net return is less than zero before you pay taxes on your income.
  3. Buy stocks if your time horizon is two years or more. Time heals all wounds, especially when it comes to stocks and markets. I don’t know when markets will recover, but they’ll eventually rebound. It is scary to buy stocks, but that’s usually the best time to add great companies or funds to your portfolio. It pays to be a buyer when others are selling, especially if they’re in panic mode, and they are.
  4. Hunker down and do nothing. If you’re comfortable with your investments and asset allocation, ride out the storm. It takes patience and courage to sit tight while others panic and sell, but your assets should recover over time. A classic 60% stock and 40% bond portfolio is down 14.15% for the year as stock and bonds fall. Despite the negative year-to-date return, it has averaged 10.04% over the past fifty years. It averaged 9.31% for three years, 9.74% for five, and 9.84% for ten. It soared 49.66% from July 1982 to June 1983, after the market fell 26% in the previous months.[2] If you adopted a buy-and-hold strategy, you would have enjoyed generous returns.

Working on the mountain reminds me that life finds a way to recover and returns to normal. There were signs of life under the snowmelt, dead trees, and broken limbs as flowers, seedlings, and the grass were starting to sprout. A rebirth is taking shape, and the long dark winter will soon be a distant memory, and the markets will recover, and the painful bear market will be a thing of the past, just like the previous twenty-eight bear markets.

Our peace shall stand as firm as rocky mountains. ~  William Shakespeare

May 8, 2022

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management, located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

Photo Credit: Mr. James Stanley

[1] YCHARTS as of 5/8/2022

[2] Dimensional Funds Returns web, 4/30/1972 to 4/30/2022.