Navigating Market Uncertainty | Investment Strategy & Financial Planning

With everything going on in the media, world, and markets these days, I wanted to provide some helpful insights to offset all the noise and conflicting information in the media, social media, and politics.

First, the War, state of the world, and implications for our money and life. Statistically speaking, Bear Markets occur intermittingly about every 4 years. The average Bear Market loss is approximately 38% (somewhat lower if you average in the “Bear Lite” market of 2022). As many of you can attest, during my 26 year career, we have helped clients navigate the Bear Market of 2000-2002 (S&P lost 44% and Nasdaq 78%) and 2008 (Where the S&P lost nearly 50% with Real Estate in the “Sand Markets” of Nevada, Arizona, and Florida losses were nearly as bad as stocks), and 2022 (where stocks “only” lost 20% but bonds lost nearly as).

For generations, the widely held view was to diversify into bonds (60/40 and 50/50 being the most common) to really help cushion against unsettling downturns and volatility of stocks. For those of you at or near retirement…. you need to be incredibly careful about Portfolio Levellosses (individual Investment losses and under performance are perfectly normal and even desirable in a properly diversified and hedged portfolio with non-correlating investments) like these because most of you are or will soon need to withdrawal money regularly to live. When, you are working and actively contributing to your 401k every two weeks market downturns are often not a major concern as you are likely buying more at a lower price and will not need to spend the money for several years which allows the volatility and returns to eventually smooth out.

For example, if your Portfolio experiences a 40% loss (with market long term averages 9% annually, including reinvested dividends, and typical market growth), how much does your portfolio need to make before getting back to even, not counting withdrawals and spending, which most of us have to do?

Answer: You need to earn nearly 67% just to get back to “even” and that of course does not include taxes, inflation, and most importantly your spending/withdrawals!

That is why I take the extra time, precaution, annoying paperwork, and sometimes more complicated tax reporting to customize your portfolio with various investments that are not in the “cookie cutter” models of most 401k plans, big financial firms, and plain vanilla ETFs, indexes, or mutual funds. While I may sometimes earn less and spend more time handling the administrative side of these investments, since they aren’t part of standard model portfolios, over the long run they seem to have made a meaningful difference. In many cases, these portfolios have tended to hold up better during downturns, which can potentially lead to improved returns, lower overall risk, and reduced volatility, factors that can be especially important when the funds are being used or will be used in the near future.

Now, like anything else, there is no perfect investment and there will be down years and periods of underperformance for these types of strategies, but that is where comprehensive and holistic planning and portfolio management come into play. We need to make sure that your spending/financial goals (after taxes, inflation, and long-term care) are fundable, and what rate of return you need to earn within your unique risk and liquidity profile. “Then” I strive to recommend the optimal mix of different revenue/return streams (diversification) to help you fund those goals.

The War in Iran: from an investment and economic standpoint the longer this lasts the more damage it does to the world economy (especially Asia and Europe as they have limited access to natural gas and oil). In addition to this, it creates inflation and contributes to increases in interest rates (which is detrimental to stocks, real estate, and bond returns). Thus, the so-called balanced portfolios, lifecycle portfolios, or the traditional 60%/40% will likely underperform in my strong view going forward. From a human, environmental, and economic/investment perspective we should all hope for a successful and speedy resolution to war and particularly oil, natural gas, fertilizer, transportation, and other commodities affect every facet of our lives (and cost of living)!

Inflation and interest rates: With much of the Western World (leading with Japan, U.S., and the Europe) this ramp up of defense spending, inflation, and government debt is causing interest rates to increase. Not only is this a negative for stocks, real estate, and bonds (please reference the previous paragraph), but can also lead to a surge in borrowing costs for our debt reliant system. The risk is increasing of a fiscal “heart attack” and growing inflation. For example: for the past 100 years the Inflation Rate in the U.S. has been about 3% annualized. That means our cost of living doubles every 24 years. At a 4% inflation rate, our cost of living doubles every 18 years, and at 5% annualized it doubles every 14 years. For those of us who want to maintain a good standard of living in retirement this is a very serious concern (healthcare and long-term care costs historically have increased more than inflation). And with the record compounding of our National Debt and deficit spending since 2001 it doesn’t take a financial genius to understand that taxes are highly likely to go up….here and Europe (they increasingly must fund their own defense spending and generous social welfare systems with rapidly aging populations that pay less in taxes and cost far more in medical and social security benefits).

I cannot begin to state enough: a near universal decline in future working age populations in the developed world, dramatic increases in people drawing Medicare and Social Security, and increasing life expectancies mean that we need to be vigilant in investing, spending, and planning outcomes (It also means that the housing boom is likely over…. please note residential real estate prices in Japan and Europe and what they have done for over a decade now).

On a positive note, “there is almost always a bull market somewhere” means that there are opportunities within these challenges, but it will likely require a much more flexible planning, investing, and spending approach. In short, just buying some ETFs that track a stock index such as the S&P 500 or buying some high-flying tech stock may not provide the income, hedging, and non-correlated revenue streams that you need to fund your best life outcomes. Here are some examples (NOT recommendations or solicitations as every situation and client is unique).

1. Natural Gas Pipelines. For those of you who followed my advice over a year ago and invested in this often misunderstood asset class “congratulations”, your yields are often in the 9%+ plus range, the values have increased substantially in the past year (and even this year), and the dividends/yields are increasing (and should continue to do so in my strong view, as the U.S. is the world’s largest producer of Natural Gas). Even before the war, Europe paid about 4x what we do for Natural Gas, Japan about 8x, and India even higher! This may lead to a further increase in prices if global supplies are disrupted (the Strait of Hormuz). The yields are “tax advantaged” meaning the distributions are largely nontaxable, but the tradeoff is k1s and depreciation recapture when you sell (outside of IRAs). I have used this in lieu of some bonds because of potential inflation protection, much higher yields, and tax advantages. 
2. Principal Protected Investments. As I have access to a multitude of Financial Firms and Banks offerings there are several variations of this. Ideally, these are best suited inside of IRAs, and they may offer upside on various stock indexes with full principal protection if held to maturity. (often 5-year maturities). 
3. Fixed Indexed Annuities. Several of you have followed my recommendations to invest a portion of your medium to long term money into these. These grow tax deferred, and you cannot lose your initial investment or yearly potential yearly gains! This can be an excellent alternative to your low yielding (and fully taxable) cash, CDs, and bonds…. offering good returnspotential and inflation protection without market volatility. However, it is important to understand products, have limited liquidity, early surrender charges and are subject to the claims paying ability of the insurance carrier.
4. Potentially hedging with Infrastructure Investments as they tend to have low correlation to stocks, stable income, and are designed to increase income over time with inflation. These tend to be much less volatile and pay a solid income that is designed (not guaranteed of course) to increase over time. 
5. For those of you even thinking about selling your rentals, real estate holdings, your business, or any highly appreciated asset…..you should contact me as there may be ways to defer the capital gains tax (potentially indefinitely), get into something completely turnkey/passive, and still earn a solid income (which too can be sheltered from taxes). 

I will be on a much dreamed about family vacation from March 30th-April the 12th, but you can always my administrative desk (their contact is below and there are now several agents instead of just John). For a review or complimentary consultation, you can contact me after my vacation.

Be well, be kind, and prosper. 

This too shall pass, but the days of American fiscal responsibility, stability, low inflation, and low taxes are well behind us. Adaptation is key….