Ask the Rational Investor: Investing in an Uncertain World
With the S&P 500 down only modestly for the year, many investors are questioning how quickly the stock market has recovered. It was surreal how quickly stock prices plummeted during the pandemic meltdown in March.
Similarly, it now feels unbelievable how quickly they are rising! Investors must realize that the stock market looks toward the future and anticipates what profits will look like in 2021 and 2022, at which point the economy is expected to have fully recovered.
Most investors have a combination of cash, fixed income, and equities in their portfolio. Depending on retirement goals, time horizon, and withdrawal rate, investors may have a significant portion in safer assets such as cash and fixed income. after the large decline in interest rates, many investors are now only earning close to zero percent on a large portion of their assets!
Low-interest rates unhinge a balanced portfolio, as the bond segment’s expected return is now near zero. This phenomenon is no accident. The Federal Reserve is trying to make equities, lower-rated bonds, and risk assets more attractive.
Uncertainty remains quite high, though, as the Coronavirus shock has jeopardized almost everyone’s balance sheet, including individuals, businesses, and countries. Due to the reserve currency status of the U.S., our country will likely fare better than others in emerging markets or Europe.
Global debt seems to be restraining the world’s long-term growth rate and flexibility to recover quickly from recessions. Debt is typically deflationary, as it diverts cash flow to interest payments rather than consumption or investment. However, the historically-low interest rates ease the burden of debt and our government’s spending policies are likely planting the seeds of higher inflation down the road.
Investors should carefully review their portfolio’s withdrawal rate, risk tolerance, and fees, as interest rates are unlikely to rise for many years. Investors should be well-diversified across different asset classes.
Beese Fulmer Private Wealth Management was founded in 1980 and is one of Stark County’s oldest and largest investment management firms. The company serves high-net-worth individuals, families, and non-profits, and has been ranked as one of the largest money managers in Northeast Ohio.