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Managing Portfolios During the 2022 Market Turmoil

Posted by Team HFM on March 07, 2022

Managing Portfolios During the 2022 Market Turmoil

The current pullback in the financial markets has crept up on us in waves:

Wave 1 – High Growth Stocks Take A Hit

Many market watchers expected the flashy, high-growth stocks that seemed to grow without limit to eventually succumb to financial reality and fall back to more reasonable prices. Consequently, the first wave was anticipated, but the timing was unknown. As technology stocks began to underperform more traditional brick-and-mortar types of companies in the final quarter of 2021, it became evident that the first wave was upon us.

Wave 2 – Inflation / Interest Rates

But then the second wave occurred as inflation appeared to be more intractable. Some investors have been concerned about inflation since the government began pouring money into the economy back in 2008. Those investors seemed to be crying wolf, as inflation remained tame all the way through 2020. But the government ramped up the cash it added to the economy during the pandemic, and it became too much for the economy to absorb.  Prices began to rise. We were told by almost every major economist not to worry, that this was only a temporary phenomenon. The herd was wrong this time and prices continued to rise. Rising prices often lead to rising interest rates and a falling bond market. Many analysts will tell you that companies can adjust to inflation and the stock market will adjust accordingly. That is generally true over the course of a few years, but early in an inflationary period, before companies can make changes, the stock market weakens as it has currently.

Wave 3 – Russia/Ukraine Conflict

Russia has brought in the third wave with its invasion of Ukraine. Along with the horrors that war brings, it also brings uncertainty and uncertainty is a condition that often produces poor market outcomes. Not knowing the eventual outcome, market participants tend to price in the worst-case scenario, until the actual outcome becomes clearer.

HFM Steps – Strengthening Portfolios

The question for financial advisors in this situation is what do you do? Do you just let the waves wash over you or do you brace yourself to be better able to withstand the impact or do you just get out of the water? If getting out of the water means selling everything, then that is not an option that we recommend. It is often costly, particularly in taxable accounts, and it assumes that the markets will continue to deteriorate. If the markets were to continue to deteriorate, selling might have been a good decision, but only if accounts are reinvested at a lower market value. That’s a fine idea, but if the markets are at lower values, it is often because the situation that drove the markets down is looking even darker and who is going to reinvest in that situation?

Doing nothing not only just sounds wrong, but also it doesn’t adjust to the changing investment environment. Which left us with the option of making some adjustments to strengthen the portfolio against the waves. We made 4 major adjustments to portfolios which include:

  • In the Spring of 2021, we replaced a portion of the fixed income part of most accounts with a diversified group of conservative alternative funds. These funds were chosen to mitigate the effect of rising interest rates and at the same time, not have a return pattern similar to stocks, thus providing a conservative counterbalance to stocks.
  • As we have rebalanced accounts over the past several months, we reduced the equity overexposures relative to account targets where capital gain limitations permitted.
  • In December 2021 we sold the overexposure in the ARKQ exchange traded fund where capital gain limitations permitted. This particular fund started out as a small exposure in many accounts, but it benefitted from the market’s love of high growth stocks and became too large for the level of risk that it takes.
  • In early February of this year, we reduced and, in most cases, eliminated the reinvestment of cash flows into equities and either left the funds in cash or purchased conservative investments.

Adjust As Necessary

As the current political and economic environment continues to develop and clarify, we may be making further adjustments. Given the growing strength of the economy over the past several months we are hopeful that the actions that we have taken will be sufficient and that further market deterioration will be minimal. If you have any questions, please as always feel free to call us at any time.

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