Over the past 10 years, the U.S. market has held relatively strong with a steady upward trend.
You probably didn’t have to think very often about your money’s performance or your retirement security. However, after a strong market performance in 2021 and the years preceding it, the U.S. now finds itself in a more volatile, turbulent and risky market.
After decades of low inflation, we’re now experiencing an annual inflation rate pushing 9% — the highest since January 1982.
In response, the Fed voted to increase interest rates by 0.75% in the June meeting, the largest increase since 1994. The Fed’s goal is to slow down demand, increasing the likelihood of a shallow recession, at a minimum. Tensions between Russia and Ukraine continue to escalate, introducing uncertainty to the market and inflationary prices for oil and other commodities.
It’s clear that the rest of 2022 and the years following will bring about more challenges and variability for investors.
Because we’re entering an unknown market landscape, it’s important to acknowledge the strategies that got you here won’t be the same strategies to get where you want to go in the future.
You may have been able to get away with your investment strategy largely on your own without much oversight in the past few years. But the markets are humbling — and past results are no indication of future performance.
Just as you can’t drive your car by looking in the rearview mirror, you can’t invest for the future based on what has worked in the past. So, how can you look toward the future and navigate this turbulent market?
Address the risk of your current portfolio
Risk is the amount of stress you’re experiencing with the ups and downs of your portfolio.
Age, tolerance for risk and assets are key factors in determining your investment strategy.
Your tolerance for risk may lessen as you near retirement, whereas a long-term, buy-and-hold strategy works better for younger investors.
For example, a portfolio mix of 70% stocks and 30% bonds is considered conservative for a younger person (under 50), whereas a mix of 70% stocks and 30% bonds is considered aggressive for a person at retirement age (over 65).
Ask yourself clarifying questions
What has changed now to make you feel uncomfortable? Do you have more assets? Are you less comfortable with potential loss?
It’s important to reassess the risk of your current portfolio given your life stage and financial goals in these turbulent times.
With an investment of only $1,000, a 10% market loss ($100) may feel inconsequential.
Yet that same 10% market loss becomes significant when applied to $1 million worth of investments ($100,000) — and even more worrisome as you near retirement.
The level of risk you take during the last few years of your working career should gradually lower as you get closer to your retirement phase.
Your investment strategy should have less overall risk, otherwise the timing of your retirement may be delayed.
How do you lower risk?
Just as you visit your doctor annually to check on your physical health, your investments require attention and upkeep. In an increasingly volatile market, it’s more important than ever to check your portfolio regularly — not just to view the numbers on your statement, but to revisit the strategy of why you’re doing what you’re doing.
To adjust for the inherent risk in this environment, a set of professional eyes, or second set, can help you to evaluate what to do next.
Using historical data, investment experts can map out potential gains or losses based on the level of current risk you’re taking. It’s critical to stress test the historical risk of your portfolio so you’re comfortable with your level of risk in these volatile times.
Phillip Mitchell, CFA, CPA, MBA, is senior portfolio manager at Kroon & Mitchell, a Grand Rapids-based, family-owned tax and investment strategy firm.