Investors have recently witnessed some of the worst trading days since 2020.
Stocks plunged in September on fears that the Federal Reserve’s aggressive rate-hike cycle could cause the economy to slow, but with more hikes to come, along with slowing growth, geopolitical unrest and persistent inflationary pressure, this could be a prolonged period of market uncertainty and volatility.
And yet there are “opportunities” even now, said Ronald Albahary, Chartered Financial Analyst and Chief Investment Officer of Wetherby Asset Management, who ranked No. 20 on the CNBC FA 100 list of Best Financial Advisors for 2022.
Perspective is key, according to Albahary. “There are relatively easy things investors can do to take advantage of this environment,” he said, “if you can look through the fog of negative sentiment.”
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“The Fed has made it clear that its No. 1 objective is to crush inflation,” said Mark Mirsberger, CPA and CEO of Dana Investment Advisors, No. 2 on this year’s CNBC FA 100 list – even if it means “they’re taking us into a recession,” he added.
“True or false, that’s where we’re going.”
Rick Keller, Certified Financial Planner and President of First Foundation Advisors, ranked #33 on the CNBC FA 100 list, also said he saw the “benefit” of the current climate. “It’s usually darkest before dawn,” he said.
Keller relies on the “barbell approach” to hedge against the uncertainty of rising rates and the possibility that the market could pull back another 10% or more.
The barbell approach is an investment strategy that seeks to strike a balance between risk and reward by investing in high-risk and low-risk assets while avoiding medium-risk options. Keller clients have half of their fixed income allocation in long-term bonds and the rest in short-term maturities.
“If we see the market go down another 10% to 20%, that will be an amazing buying opportunity,” Keller said.
Here are three strategies top-ranked advisors are using to guide their clients through the downturn:
1. Build a diversified portfolio
“If you were 60% or 70% in stocks, reduce that to 40% or 50%,” Mirsberger advised. “The fixed income side may have a bigger weight because there is less volatility and more opportunities.”
When it comes to stocks, stick with the best companies in a range of sectors. Look for “strong brands,” he said, “like Microsoft, Google, Amazon and Facebook — we still see value in these perennial producers.”
“The market sell-off has been indiscriminate; quality companies will recover faster than others,” Mirsberger added.
For his clients, Keller also recommends reducing exposure to emerging markets, stay with high quality stocks and diversify.
“I would like to stay very diversified here because in the end it’s hard to choose one sector over another and the prices are quite low,” he said. “If you’re looking at three to five years, you’re going to make a lot of money.”
2. Focus on fixed income securities
Since the Fed raised rates, Treasury yields have soared. “The good news is that you can now earn income from your very conservative portfolio or your Treasury bills,” Albahary said.
This makes treasury bills and relatively risk-free short-term funds suddenly more attractive.
“Savers have been punished for 20 years,” Mirsberger said. “It’s really the first opportunity, what many would say is an acceptable level of return without too much risk.”
Albahary agreed that investors should shift some allocations to fixed income securities.
“Fixed income, which has been more ‘fixed’ than ‘income’ for far too many years, is becoming more attractive,” Albahary said. “You are now being paid 4% or more for a risk-free asset, that’s a bit big,” he added, referring to an easy win.
Both advisers suggest laddering your Treasury bills to ensure you get the best rates, a strategy that involves holding bonds until the end of their term.
3. Crop losses
To take advantage of the recent selloff, bank those losses and use them to offset future profits.
“Now is the time to reap those losses,” Keller said. “I think it’s like money in the bank.”
Collecting tax losses allows you to offset investment gains and, if the losses exceed the gains, up to $3,000 of ordinary income. Anything left over can be carried forward to future tax years.
“It puts a dollar in your pocket, compared to 75 cents,” Albahary added.
Just be sure to avoid the “wash sale rule”: if you reinvest in a substantially identical investment during a 30-day window before or after the sale, you can no longer recognize the loss for tax purposes.
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