What Does the Current Market Volatility Mean for My Financial Plan?

We know many investors have found recent world events and the global investment markets of 2022 unsettling, and we thought you might appreciate hearing our perspective. Below are some questions we have received from our clients and additional questions we thought you might have. We hope these insights provide some perspective regarding our current thinking while allowing you to pick and choose the issues of interest to you.

What has happened in the investment markets and why?

So far this year, most stock and bond markets have declined in value. Broad U.S. and international stock markets are in what is referred to as “correction” territory (declines of 10% or more) and are quickly approaching a “bear market” (declines of more than 20%). Although it is impossible to say precisely what causes stock market declines, factors this year have included the war in Ukraine, supply chain challenges, high levels of inflation, and the U.S. Federal Reserve’s moves to increase interest rates.

The broad bond market has also declined about 10% so far in 2022 primarily driven by the Federal Reserve’s increase in interest rates along with its communication about future rate increases. The level of this decline is well beyond normal bond market activity in any given year.

I realize that stock market declines and volatility are “normal,” but why doesn’t it feel “normal”?

We completely agree—each decline in the stock market feels unique from others. The potential causes for any given decline, as well as the possible outcomes, do not exactly match declines we have experienced before. As a result, there is no normal-feeling stock market decline, and it feels different in real time than it appears on paper. It is important for us to acknowledge this reality and be aware of how it can impact our thinking and our behavior.

How long will this stock market decline last and how bad will it get?

We do not know how long this decline with last and neither does anyone else. There is a very short list of future financial events that we can anticipate (i.e., the timing of companies announcing their earnings or scheduled law changes). However, the list of future events that we cannot predict is endless. To compound the issue, how markets will respond to these events is also unknown. This high degree of uncertainty is not a flaw but a foundational characteristic of stock markets. In fact, it is largely this uncertainty that allows the price of investments to lead to more attractive returns longer term. Instead of fearing, avoiding, or guessing these unknowns, our approach is to help you have an investment plan that incorporates them and even tries to take advantage of them.

Should I worry about my investments?

One of the benefits of having a financial and investment plan is that it allows you not to worry about your investments when inevitable market declines occur. We align our clients’ plans with the anticipated time frame of when they will need money from their investments to meet their goals. This approach means investing money that they may need in the short term (next one to two years) in money market funds and high-quality, short-term bonds; in the intermediate term (five to eight years from now) primarily in bond funds; and for the long term (ten years and beyond) primarily in stock funds.

By following this time-based approach with your investments, you do not need to focus on or worry about short-term stock market declines because the cash needed for your immediate needs is not invested in stock funds. Declines in stock markets create opportunities to invest additional money at more attractive prices and to reposition existing holdings to market segments that have declined further and may provide options for better long-term returns.

What about the bond markets? Why is their current decline different?

The speed and depth of the bond market decline is the worst investors have experienced in many decades. However, the news about bonds is not all bad. The primary reason for the bond market decline is increasing interest rates and not defaults by the issuers of bonds. This distinction means that the price declines do not reflect a permanent loss of value. If fund managers hold the underlying bonds to maturity, investors still receive the full amount of principal. In addition, bond interest rates have generally increased much more quickly than the underlying rate hikes implemented by the Federal Reserve. If the Federal Reserve’s future interest rate increases match the bond market’s expectations, then current bond prices may already reflect much of those increases and the resulting impact. Lastly, as investors use new money or the proceeds from other bond maturities/sales to buy new bonds with higher interest rates, they will receive more attractive rates of interest going forward.

How is Blue Trust thinking about the current market environment? Are you doing anything differently with the investments you manage?

No one wants to see account values go down. We understand the stress it can cause investors. We are not surprised by challenging markets, however, and we expect them to occur periodically. Although unsettling, they do not rattle us or cause us concern about the long-term financial wellbeing of our clients. We work hard to help create sound financial plans that are resilient and capable of riding through the inevitable ups and downs of investment markets. Our team of investment strategists continuously look for opportunities to take advantage of areas in the markets that may be mispriced or otherwise present attractive return options.

One strategy we use for our clients when we update their portfolios is to attempt to capture capital losses in their taxable investment accounts that can reduce taxes . We also continue to monitor the appropriateness of the amount of assets they have in each of their investment buckets (short-, intermediate-, and long-term). If clients need cash from their portfolio now that exceeds the amount in their short-term bucket, then we will judiciously consider how to generate that cash by looking to sell pockets of their portfolio that either have not declined or have not declined as much. We would counsel our clients that if they have excess cash that they do not need in the next several years, they should continue investing that cash according to their financial plan.

What should I do next?

Our experience has shown that the behavior of an investor is just as important to their long-term results as the behavior of the investment markets. We strongly believe that sticking to an investment plan as markets experience periods of turmoil will bear fruit for investors in the long-term.

From a practical standpoint, we would encourage you not to look at your accounts more often than needed for prudent oversight. You can think of your portfolio like a garden or crop—the leaves may not look great following the recent storm, but you know the root structure is healthy and the soil is good. If you can avoid disturbing your portfolio too much, we believe it will produce reasonable returns over time. We would also urge you to be wary of predictions about the future, especially as the confidence and boldness of those predictions increases.

We hope you found these questions helpful in processing the current environment. At Blue Trust, we believe in the principles of applied wisdom, uncertainty, and instability. No one knows what the future holds so we encourage our clients to diversify wisely and stay invested over the long term to help meet their financial goals.

If you have additional questions or want to discuss your investment strategy, please reach out to your Blue Trust advisor or contact us at 800.987.2987.



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