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Stay Steady

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Stay Steady

After several strong years for equity markets, 2022 has begun with increased volatility, namely surrounding issues of higher-than-expected inflation, supply chain issues and more recently, tensions that have developed into conflict between Russia and Ukraine. It is understandable to feel fear when turning on the TV and seeing the constant “Breaking News” headlines as markets experience downside volatility. As of yesterday, February 23, 2022, the S&P 500 is down over 11%, officially putting domestic stocks in correction territory to start the year. While this is not a pleasant experience, it is important to note that the recent downside movement in markets comes after domestic stocks continued to hit all-time highs throughout 2021. Domestic equity markets have still returned more than 10% over the past year, even when including the recent selloff. And those returns look even stronger when analyzing trailing returns over the past three, five and ten-year periods.

Recently, we wrote about the fact that volatility is normal, markets tend to do well after corrections, and our emphasis should always be placed on the long-term power of markets, not the short-term whipsaws that occasionally come our way.  We want to reiterate that philosophy in light of the current geopolitical landscape and uncertainty about what it might mean for investors. 

At DHG Wealth Advisors, we build custom portfolios and strategic life plans for our clients at the beginning of our relationship. Your portfolio has been uniquely structured to address your personal goals, cash flows, and risk tolerance. It is built with diversification in mind, investing not just in domestic stocks, but in international stocks, fixed income, cash, and for some, alternative investments. These additional asset classes dampen the volatility within your portfolio and help smooth out the ride during times of market stress. The below chart highlights the returns of a balanced portfolio relative to the varied returns of any individual asset class. We have seen the benefits of diversification continue to play out so far in 2022. For example, while the S&P 500 is down more than 11% year-to-date, developed international and emerging international stocks are only down approximately 5% and 2%, respectively.  

Source: Barclays, Bloomberg, FactSet, MSCI, NAREIT, Russell, Standard & Poor’s, J.P. Morgan Asset Management.

Large cap: S&P 500, Small cap: Russell 2000, EM Equity: MSCI EME, DM Equity: MSCI EAFE, Comdty: Bloomberg Commodity Index, High Yield: Bloomberg Barclays Global HY Index, Fixed Income: Bloomberg Barclays US Aggregate, REITs: NAREIT Equity REIT Index, Cash: Bloomberg Barclays 1-3m Treasury. The “Asset Allocation” portfolio assumes the following weights: 25% in the S&P 500, 10% in the Russell 2000, 15% in the MSCI EAFE, 5% in the MSCI EME, 25% in the Bloomberg Barclays US Aggregate, 5% in the Bloomberg Barclays 1-3m Treasury, 5% in the Bloomberg Barclays Global High Yield Index, 5% in the Bloomberg Commodity Index and 5% in the NAREIT Equity REIT Index. Balanced portfolio assumes annual rebalancing. Annualized (Ann.) return and volatility (Vol.) represents period from 12/31/05 to 12/31/20. Please see disclosure page at end for index definitions. All data represents total return for stated period. The “Asset Allocation” portfolio is for illustrative purposes only. Past performance is not indicative of future returns.

  Guide to the Markets – U.S. Data are as of June 30, 2021.

Additionally, there are proactive steps that DHGWA can take during times of volatility.

1. The first step is to stay disciplined, knowing that attempts at timing markets is not a winning proposition. The below chart illustrates the negative impact of being out of markets, even for just several of the best days of the year. This issue becomes even more compounded when realizing some of the markets’ best days immediately follow recessionary environments or downturns in the market.

2. The second step is to add value to your portfolio, where possible, during times of distress. This includes strategic rebalancing and tax-loss harvesting within taxable client accounts. For example, during the COVID crisis of March 2020, equity markets quickly sold off by more than 30%. By actively rebalancing portfolios back to target and harvesting any applicable losses, clients stood ready to profit from the rebound that came quicker than anyone expected.

Markets reward long-term investors. The following chart highlights some of the big economic and geopolitical events throughout the past 50 years.

Source: Dimensional Fund Advisors

Each of these events brought negative headlines, discomfort and uncertainty, but the long-term trajectory of markets rewarded investors for their discipline and patience. At DHGWA, we always focus on staying disciplined, controlling what we can control, and helping our clients navigate periods of market volatility.

If you have any questions or would like to further discuss your personal situation, please reach out to your financial advisor.

The information in this article should not be considered investment advice to you, nor an offer to buy or sell any securities or financial instruments. The services, or investment strategies mentioned above may not be available to, or suitable, for you. Consult a financial advisor or tax professional before implementing any investment, tax or other strategy mentioned herein. The information herein is believed accurate as of the time it is presented, and it may become inaccurate or outdated with the passage of time. Past performance does not guarantee future performance. All investments may lose money.