Investors need a strategy for the rest of 2022: here’s a 3-point plan

Early in the second half of 2022, it might look like the stock market is repeating its first-half performance: spotty performances dragged down by a basket of worries.

So if an investor had cash to spend, would they spend it the same way now as they did in January?

That depends on a person’s risk tolerance, and that risk-reward tactic feels very different in a bear market in the midst of inflation in a maximum of 40 years and persistent concerns of an impending recession.

“During a bull market, investors say they are comfortable staying the course if the market goes down,” said Shane Sideris, managing partner at Synchronous Wealth Advisors in Santa Barbara, California. But when the market is in a downward spiral? “That can be a very different story,” he said.

Sideris is currently dealing with the “overnight” difference between the market risks that some of its clients have said on paper they can bear and what they are actually willing to live with in reality. “The most important thing is to find out why they want to sell, why they want to go to cash,” she said.

“Research shows that people engaged in abstract thinking are more likely to take risks compared to people with a concrete mindset,” said cognitive scientist Sian Beilock, author of “Choke, What the Secrets of the Brain Reveal About Getting It’s Right When You Have”. A.”

“Thinking in the abstract also makes us more likely to focus on the possible positive aspects of an action, so we are often unprepared to face the reality of loss,” said Beilock, who is also president of Barnard College.

‘We are still seeing net purchases. I admit he’s not that aggressive.


— Steve Sosnick, Chief Strategist at Interactive Brokers

To be sure, some risk-tolerant investors see buying opportunities. For example, many retail investors can’t get enough of buying their favorite stocks, at least not yet, according to analysts at Vanda Research.

“We are still seeing net purchases. I admit it’s not that aggressive,” Steve Sosnick, Chief Strategist at Interactive Brokers IBKR,
-1.09%,
he told MarketWatch.

Still, he added, “there is a litany of different ways investors have reduced risk. Crypto is the most obvious.” Bitcoin BTC USD,
-2.33%
has fallen more than 70% from its record high in November.

On Friday, the Dow Jones Industrial Average DJIA,
-0.15%,
S&P 500SPX,
-0.08%
and Nasdaq Composite COMP,
+0.12%
found a firmer foundation. On Friday, the government announced a robust 372,000 new jobs in June.

On Wednesday, Federal Reserve officials signaled that they were ready to move forward with further adjustments. Last month, the central bank raised a key interest rate by 75 basis points. Yon an attempt to control inflation, the the biggest increase in the reference rate since 1994.

Of course, investors can’t control the Fed’s next move, but they can control what they do next. No one can guarantee market results or investment returns, but here’s how to address and assess risks:

1. Know the difference between risk capacity and risk tolerance

If markets don’t provide enough lessons on risk, quizzes like this one from Vanguard or east of the University of Missouri – can give people an idea of ​​how their risk appetite compares to others.

But there’s a difference between the investment loss a person’s portfolio can handle and what their brain can handle. Ideally, a person’s “risk capacity” matches their “risk tolerance,” Sideris said.

(Risk tolerance relates to the amount of risk that investors are willing to accept. Risk capacity is how much investors are can to accept, given your finances, age, and investment schedules.)

However, the two rarely align, he added.

“Unless you are actively spending your savings (ie retirement) or about to spend your savings (ie near retirement), your risk capacity likely hasn’t changed. Most people’s risk capacity doesn’t change much as a result of market volatility. But your risk tolerance can change considerably. This is human nature,” she said.

Risk tolerance relates to the amount of risk investors are willing to accept. Risk capacity is how much investors can accept.

There is also a gender gap, Beilock said. “While men are more likely to be overconfident in their financial knowledge and take more financial risks, women tend to be more risk aversion Y doubt your own financial knowledge,” he said.

Girls can become anxious about math at a young age, according to Beilock research you’ve found, and that can translate to concerns about money management and investments later in life. “Since uncertainty exacerbates anxiety, times of financial uncertainty are more likely to make investors, especially women, more anxious about their financial future,” she said.

2. Tap into your healthy emotions

Financial advisors constantly tell clients to avoid investment decisions driven by emotions, headlines of the day, and short-term information. That’s sound advice, but experts said people can still harness their emotions for the good of their portfolio and money mindset.

One way is to find your “nighttime sleep number,” said Lauren Gadkowski Lindsay, a certified financial planner with Houston, Texas-based Beacon Financial Planning.

That is the amount of money that a person feels they always need quick access to in case of an emergency. With that amount saved, Lindsay said one person can build the rest of her portfolio.

Writing it down and talking about it can help, Lindsay said. “I think it’s important to basically say again what you care about in this market.”

Financial advisors tell clients to avoid investment decisions driven by emotions, headlines of the day, and short-term information.

“Every investor needs to do a periodic internal review when markets go down,” Sosnick said. “If you’re only stressed about a 1% or 2% drop on any given day, if that’s extremely upsetting, then you’re taking too much risk.”

There are several ways to eliminate that risk, he said. It could be moving toward stocks with less volatility, as measured by their “beta.”

(The stock market has a beta value of “1” – any stock above that number has more volatility than the stock market, meaning it will rise more than the market when it rises, and vice versa for a number below of 1″. “)

Reducing risk could mean more exposure to bonds or putting more money into cash, Sosnick said.

As the recovered market after plummeting in the early days of the pandemic, there were no “gut control days” for much of 2020 until the fall of 2021. “Since then, frankly, we’ve had a lot,” Sosnick said.

3. Recession-proof your portfolio if you’re risk averse

Opinions differ about the certainty and strength of an upcoming recession, but some investors You may not have seen the worst funds on the market yet.

There will be shares that will sell at bargain prices for risk-inclined investors, Sosnick said. (Oaktree Capital founder Howard Marks, feels the same way.)

But there are ways to stay cautious, Sosnick said.

“What we’ve seen across the board is a renewed focus on sustainable earnings and sustainable cash flows,” he said. There are several ways to measure a company’s strengths and weaknesses, but it pays to keep an eye on the data surrounding cash flow, Sosnick said. In times of uncertainty, look at how much cash a business has.

On the other hand, Lindsay said investors can reduce their risk exposure by looking into capital-preservation mutual funds or conservative-leaning breakeven funds.

Just don’t think it’s complete protection against loss, Lindsay noted. Bonds, whether in this type of fund or in others, have been taking hits too. “Right now, there is nowhere to run, nowhere to hide,” he said.

A move for the risk-averse: Check out how your money is actually being deployed and invested in your 401(k).

Another move for the risk-averse? They should check to see how their money is actually being deployed and invested in their 401(k) plan, Lindsay said. For example, a target date fund allocation might not match a person’s comfort level. One client has money in funds designed for the lowest risk exposure in 2030 and 2035, even though she plans to retire years later, she noted.

Finally, remember that there is risk in total avoidance.

Suppose a person invested $500 a month in the S&P 500 starting in 1982. Then the Great Recession downturn scared them into cashing out their money in March 2009. They would have accumulated roughly $475,000, Sideris said.

Had they stayed the course, even with recent market declines, Sideris said they would have amassed roughly $3.2 million through the end of June.

Of course, they would have to live through multiple recessions, rate hikes, bear markets, bouts of global instability and a pandemic during that 40-year span, Sideris said.

“No one really stays the course. Everybody knows they should do it, but it’s really hard to do it.”

Also read:

Bank stocks are super cheap, even with the risk of recession

Leave a Reply

Your email address will not be published.