With increased inflationary pressures, increases in interest rates, and talk of a slowing economy, I believe it would be helpful to review some key points. Maintaining proper perspective can help us overcome any anxiety or discomfort we may feel and take a thoughtful approach to our investment decisions.
- Will we go into a recession?
I hate to say it, but it really doesn’t matter. Recessions are historically hard to predict. We can’t predict when they will happen, how long they will last, nor how the market will respond. And since the market tends to anticipate things, by the time we are in an official recession, the market may have already bottomed. The reason it really doesn’t matter is because we don’t know how things will respond. And therefore, any financial decision made based on recessions is akin to speculating.
- What about interest rates increasing?
Longer term interest rates have gone up a lot this year already. Interest rates, like the stock market, are forward looking. So even if the Fed increases short-term rates as they plan, that doesn’t mean long-term rates will continue higher – many interest rate increases have already been priced into the bond market. The reality is that the Fed is taking away the proverbial punch bowl. Things will tighten up. Maybe that will push us into a recession, maybe not. As I mentioned above that cannot be predicted, so it doesn’t matter.
- My investments are down in value. What should I do?
It is important to remember that we own high quality companies. We are not invested in the price movement of a stock. We are invested in the underlying company. The value of your accounts only shows how people feel about the underlying stocks at any point in time – which is why they fluctuate so vastly. The market is a mood barometer. It is not a reliable indicator of the actual value of the companies you own. Fluctuations in portfolio values do not represent the quality of the companies you own, the dividends they pay, nor their potential.
- What if the stock market goes down more?
That is a possibility. If they go down substantially more, if cash is available we should consider buying more of these high-quality stocks at a lower price. Everyone likes to buy things on “sale” and the market is on “sale” right now. We all want to buy low. Easier said than done. But that is the plan. It can be painful to watch in the short-term, but history has demonstrated that investors who stay the course and take advantage of stock market losses are rewarded in the long term.
If you have any questions or would like to discuss any of these points (or anything else), please let me know and we can set up a call.
Past performance cannot guarantee future results. Investing involves risk including the potential loss of principal. Current performance may be lower or higher. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Please note that individual situations can vary. Therefore, the information presented in this letter should only be relied upon when coordinated with individual professional advice.