As financial planners, our goal is to assess current economic and market conditions and then design portfolios and select assets that have a good chance of being successful in whatever environment we encounter. Today we have very challenging financial markets, and we recently finished the worst half-year start in market history.
Hardest to understand is the “nowhere to run, nowhere to hide” mentality of this market. Historically, inflation is countered in portfolios by overweighting assets that have generally responded positively to overall rising prices. Among these are precious metals, inflation-linked bonds, real estate, commodities, and general equities. Recently, however, these assets have been falling in lockstep with the general market.
Asset classes that are traditionally friendly to inflation can easily be represented in portfolios. Many Exchange-Traded Funds (ETFs) are available to today’s investors at (lower) market prices, and with minimal expenses. History doesn’t provide us with any guarantees, but patterns of success and failure have always tended to be repetitive. Since inflation-friendly asset classes are on sale right now, adding small percentages to your portfolio may give your personal recovery a boost when the market changes focus.
Planning portfolio allocations and positions must be supplemented by common sense. History is on the side of those who avoid past errors. Patience is required, along with faith in the American economy. Right now, holding an above-average amount of cash in money market funds will allow investors to take advantage of opportunities that will inevitably arise. One helpful method of generating cash is to seek tax losses that can be harvested before year-end. This applies to non-tax-qualified funds held in brokerage accounts.
For qualified funds (IRAs, 401(k) Plans, etc.), today’s low asset prices present opportunities to perform Roth Conversions at very low prices, lessening the tax burden, while setting up tax-free growth as the market recovers. Since Roth accounts are never taxed, once established, and do not have mandatory Required Minimum Distributions (RMDs), savings can accrue over the rest of an investor’s life. Roth Conversions can no longer be reversed, so be cautious.
Meanwhile, every day brings us closer to a bottom, and history teaches us that a turnaround will occur when we least expect it. Losing out on the first few days of a recovering market is a formula for failure. As difficult as it has become tolerating the 2022 market slide, our best expectations are for long-term success through well-planned investing.
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