Finding Pros in a World of Cons
There is no doubt that it’s been a rough start to the year within the global financial markets. For investors who have been around the block, this isn’t anything new. For new investors, it may be the first time experiencing a difficult market environment. Whether your new to investing or have gone through many market cycles, it doesn’t necessarily make it any easier in the moment.
As a reminder, future corporate earnings and macroeconomic data are the main drivers of medium and long-term trends of the stock market. In the short-term, however, trends tend to be driven more by emotional/psychological responses to these data points. As we’ve seen over the past few months, the emotional response seems to be one of discontent and anxiety.
In times like these, we usually send out messages similar to: Stay the course! Focus on the long-term goal! Stay calm, market downturns are normal! Of course, all of these statements are still true, but we’ll bet you’re sick of reading them by now! As you might know, we have already sent communications out similar to these…so we figured for this month, we’d try something a little different. First, let’s talk about what has gone well for many folks over the last few years:
What’s Gone Well? Stock Market Returns Still Very Positive
It’s always easy to look at a year like this and feel pessimistic around market returns. Instead, if we zoom out a few years, we can see that those who have remained invested have still benefited a substantial degree. While the market may be down this year, if we look over the past 5 years, someone invested in the S&P 500 would still have a total return of nearly 52%. Zoom out ten years post financial crisis, an investor’s total return jumps to 173%. That’s a phenomenal return (over 10% compound annual growth rate), and one that still exceeds historical annualized returns. Even since the pandemic lows in March of 2020, the S&P 500 has returned about 52%.
Lots of Families Have Locked in Low Interest Rates
As our country has started to battle inflation, interest rate hikes have been a tool used in order to slow down demand. In fact, we have seen mortgage interest rates creep up (sky-rocket) to around 6% (traditional 30-year mortgage) from their lows. Many homeowners took an opportunity to refinance in the last few years and have locked in these low rates for the life of their loans. For those who have had the opportunity to refinance or purchase a home, it’s a story of taking an opportunity. Some families have locked in rates in the 2.5% to 3.5% range. These rates are an amazing inflation hedge and sets families up to be in a great position of higher monthly cash flows that can be invested or to fund other important financial goals.
We Continue to Look for New Opportunities – iBonds
Just like your mortgage, in any financial environment, it’s important to take opportunities as they come up for a better chance to meet future financial goals. For example: while inflation has remained frustratingly and stubbornly high, a benefactor to high inflation has been Series I Bonds. For those with strong cash positions, Series I Bonds have been a fantastic way to both protect principal and also receive an incredibility strong inflation adjusted yield. It would be pretty difficult to find another option with guaranteed interest rate similar to I Bonds in the current environment (current composite rate of 9.62% - You can read more here).
Time for Roth Conversions?
Another opportunity to potentially look at are strategic ROTH conversions. Market selloffs can present themselves as amazing times to strategically convert pre-tax retirement funds to ROTH accounts. For families for whom it makes sense, if you can convert shares of stocks/ETFs/mutual funds at current levels and receive the potential recovery in prices within the ROTH account, it could be powerful. If you wanted to convert a specific dollar amount today, you could convert more shares now for the same dollar figure (compared to 6-months ago because prices are down), which in turn, means more shares will participate in any recovery in prices. Although there are a lot of considerations (especially around taxes) with ROTH conversions, for the right family, it’s absolutely worth a look.