Staying the course with your portfolio

If you’ve stayed invested for the past several years, then your portfolio should have experienced strong returns up until recently.

Source:  Morningstar, S&P 500 Price Return

This was primarily driven by strong stock market performance, but also from positive performance from bonds if you’ve been invested a balanced portfolio.

More recently, market uncertainty has caused volatility in the markets, which has resulted in year-to-date negative returns in both stocks and bonds for the first time in a long time.  It all started back in November when the Federal Reserve announced that it was changing the accommodative policy it had put in place to deal with COVID to a policy of raising interest rates to dampen inflation.  Geopolitical risks have added to the daily volatility, but are expected to have less of a material impact on the U.S. economy longer term.

The Fed’s announcement started a revaluation of expensive (overvalued) stocks and higher interest rates negatively impact bond prices too.  The impact on both stocks and bonds is reflected in the value of investors’ portfolios lately and may take some time to play out.

If you are a long term investor and your portfolio is aligned with your longer term goals and objectives, then the current daily ups and downs or the fear mongering of a talking head on TV should not change your outlook.

Trying to outsmart the market is difficult and, as the noted investor Peter Lynch put it, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”

S&P 500 Total Return

The stock market goes up over time, but it doesn’t go up in a straight line.  And along the way, corrections come and go.  The same can be said for the impact of interest rate cycles on bonds.

It’s important to remember that interest rates are being raised to combat inflation, which ordinarily (but not always) corresponds with stronger economic activity. Rather than trying to time the market and/or hide in safe assets, these have been good times to continue to invest.

If the worst of the pandemic is behind us (fingers crossed!), then we could be moving into the growth phase of the market cycle.  While certain sectors of the economy (energy, utilities) may feel safer today, this reassurance may be fleeting.  Over time, you want your portfolio to grow and keep up with inflation.  And so, long-term, you should own stocks of companies that are actually growing.

In the short-term, rising interest rates are also negatively impacting the value of bonds.  However, rising interest rates can actually increase a bond portfolio’s overall return longer term.  This is because money from maturing bonds can be reinvested into new bonds with higher yields.

Like trying to time the stock market, selling bonds after the recent increase in rates, which has driven down prices, is simply chasing past performance.  Continue to look forward.  At current higher yields, the outlook for bonds is better than before bond yields started to move up.  One reason is that, with higher yields, greater interest rate income is coming.  And as yields increase, the odds of future capital losses on bonds decline.  So like with stocks, now is not the time to abandon bond allocations.  The more bond yields rise over time, the more appealing bonds become.

If you’re overweight stocks after many years of strong stock market performance (and depending on your particular circumstances), then rather than abandoning bonds as a result of recent performance, you may want to consider allocating more to bonds in your portfolio instead.

Both the stock and bond markets provide positive returns over the longer term, but for investors, the only way to realize these returns is to stay invested through the ups and the downs.  Today is no different.

Make sure that your portfolio’s investment strategy and allocation is aligned with your long-term goals and objectives and then stay the course.  If you have any questions, reach out to your ACM Wealth Advisor.

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