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Common Market Questions

We know that your anxieties over stock market volatility, inflation, interest rates, war, and the potential of an economic recession are growing by the day.  We feel your emotional pain when stock market indices fall more than 3% like they did today.

First, we want you to know that we are eager to take your calls, answer your email, and meet with you in person.  Our mission is to relieve you of as much financial stress and emotional anxiety as possible when it comes to your retirement accounts.  We are committed to providing you with fiduciary investment advice that is in your best interest.

Second, we thought it would be helpful to provide you with our answers to many of the questions that you are asking us right now.  We hope these answers will calm your nerves and give you important perspective on the future of your investments.

Today’s Most Common Market Questions Answered

Q: Why are most stock market indexes down over 10-20% since the beginning of the year?

A: Market prices reflect the collective wisdom and expectations of 10’s of millions of investors around the world.  As global news and events occur, the Markets quickly react and adjust pricing.  The war in Ukraine, the lingering supply chain issues, inflation, and rising interest rates are all impacting current market prices. Market Corrections (declines of 10% or greater) and Bear Markets (declines of 20% or greater) are normal and they should not worry or concern long term investors.

Q: If the Markets are down over 10-20% right now, should we expect 2022 to be a negative year in the markets?

A: Stock market declines over a few days or months may lead investors to anticipate a down year.  But the US stock market had positive returns in 17 of the past 20 calendar years, despite intra-year declines that ranged from 3% to 49%.  Volatility is a normal part of investing.  Market declines may be scary, but they shouldn’t be surprising.

Q: Should I try to time the Market right now by taking my money out of stocks and bonds until things calm down?

A: No! The impact on the future balance of your retirement or investment account after missing just a few of the market’s best days can be profound.  Just as no one can predict the downward movements of stock market prices in advance, so too is it impossible to accurately predict the timing of price increases.  Because the stock market is forward looking, market recoveries often occur when economic pain is at a maximum.  Sharp price increases almost always occur when they are least expected.  There is no proven way to time the market (i.e., targeting the best days or moving to the sidelines to avoid the worst), so history argues for staying put through good times and bad.

Q: Why have my fixed income (Bond) funds also declined in value this year?

A: Short term fluctuations in bond prices are a normal consequence of interest rate cycles, but bonds are still considered a good long term investment that will provide positive returns over time.  Typically, higher future inflation and interest rates make current bonds less attractive.  This is because most bonds pay a fixed interest rate (or coupon), and if interest rates for newer bonds rise, investors no longer prefer the lower interest rates provided by older bonds.  Despite current fluctuations in bond prices, bonds play an important role in dampening the volatility inside an investment portfolio, providing liquidity, generating income, and meeting sensitive tax needs.  The good news is that rates are more attractive now, which can be positive for future bond returns over time.  

Q: Should I be in cash right now?

A: Typically, you should only hold cash or money market funds in an emergency fund, or if you have a short term (0-24 months) need for liquidity (i.e., saving to purchase a car, home, or other big ticket item).  Under most circumstances, we don't recommend holding cash in a retirement savings account at any time - either pre-retirement or post-retirement.  With real inflation at 8.5% or higher - cash has a current negative equivalent yield of 8.5%.

Q: How should I be allocated in my 457(b) deferred comp, IRA, or any other retirement account right now?

A: Your investment time horizon is the MOST important factor in our answer to this question.  If you are still 7-8 years away from taking distributions from a retirement account, then your best chance to achieve investment return and grow your retirement balance is likely to be in an all equity (stock) portfolio.  Remember, while you are actively contributing each month into your retirement account, you are purchasing stocks at cheaper prices when markets are down.  In most situations, we recommend that only those with a shorter time horizon until retirement should hold bonds in their retirement account.  However, even in retirement, research argues that you should hold no more than 40% of your retirement assets in bonds or fixed income and no less than 60% in stocks if you need your retirement income to last up to 30 years or longer.

Q: Is a recession coming?

A: At some point…probably, but there is no reliable way to predict it, and economists won’t know if the U.S. economy has entered into a recession until 6-9 months after the fact.  Historically, stock market prices tend to rise during recessions because the Market is already anticipating the economic recovery.  Furthermore, as we have already stated, the opportunity cost of being out of the market for even a brief time can have a devastating impact on your investment portfolio performance.

As always, please reach out if we can be of assistance! 

- Your DecisionPoint Financial Planning Team -