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Structure Matters: Business, Security Selection, Portfolio Strategy, Lifestyle, Process Solution

Stressed about your Finances and Portfolio Strategy?

These days, there is a great deal of negative sentiment shaking confidence in markets. Near-term headlines overwhelmingly highlight rising risks and lack a tone of confidence in the future.

  • Are we in a “Bear Market?” When did we enter it?
  • Interest rates are going to rip higher and crush bonds.
  • Inflation at 7.5% will permanently erode our standard of living.
  • War between Russia/Ukraine and China/Taiwan.

All this noise is evidence-based, and to some investors, concerning. Moreover, it is not aligned with most investor experience because the overhang sets a tone for a head-on collision.

Perhaps the answer to finding “Zen” in your outlook is to walk through a planning session with your financial advisor or compartmentalize your financial circumstances. Do you have investments in buckets? Alternatively, you can simply raise cash in an incremental fashion, followed by a plan to get back in as you find more measured Beta. Action sometimes feels like control.

Breaking Down the Structural Problem

Ironically, forecasting a “Black Swan” is a contradiction in terms, and mostly (in my judgement only), an effort to look smart. Deal with what you can control. If you are nervous about the markets, address the first structural problem.

  • First problem: is a decline of 10-20%, 30-40% in the markets going to be an opportunity, a life changer for you, or just a bad moment in time? Obviously, some of the answer here is measured in terms of how close you are to retirement. Putting the first problem into context can help with the second layer problem.
  • Does income from your investment portfolio drive your income? If portfolio income is in fact a primary driver for your lifestyle, look at your expenses! Find the equilibrium between income and expenses early on. Everyone wants more income, but in a world where costs are going higher, determine your variable costs and your fixed costs. What is needed and what is desired? We speak to financial advisors all day long who deal with planning issues, investment portfolio strategy and client goals. A little tough client love is not a bad thing right now. Tell your clients there are no easy answers and taking on more market risk is clearly not an option when circumstances are changing. As the saying goes, markets do not do well climbing a wall of worry, so wait for clarity.
  • Cash or rainy-day money.

Answer: It may be a surprise to some, but it seems that burning money by holding cash is a recent trend. According to the Office of Financial Research, money market funds are at comparatively high levels, similar to Covid peaks.

 

Cash is an asset class that may be a guarantee negative return right now, but its calculus is clear (negative 5-7% vs inflation). If you were conservative in 2021, your return stream may already reflect a hefty cash balance. If you were aggressive before, with lots of market Beta, cash will help even more. Cash, as an asset class, is a balancing solution that provides peace of mind in volatility. To be clear, while providing a guaranteed long-term loss of capital, even such a loss is quantifiable. Note that as the Co-PM of BLOK, my eyes are open to this statement, drawing the ire of questions around Bitcoin being a store of value over cash. My answer: I am neither a trader nor a maximalist. Market volatility can lead to bad decisions, so any extreme position should be minimized.

Conclusion: Nervous? Take Incremental Steps

Beta measured volatility in up-markets is exciting and rewarding. However, in a volatile or weak market, people may want to access their financial situation. Our “structure matters” message may be boring, but people’s quality of life can be impacted by their financial pressures. It can be challenging to have a clear head in certain periods of time. Compartmentalizing your near-term cash burn and your long-term portfolio buckets can help stabilize stress. Such a plan also helps investors know they have control over the problem. Remember the good news: in most circumstances, these recent bull markets have probably led to investors meeting goals earlier than traditional assumptions. Last comment: do not make extreme decisions based upon nervousness. Feelings are not an investment strategy or foundation for an investment plan.

Footnotes and Interesting Tidbits

All this negativity may be driven by media viewership being down by 30-40%. https://deadline.com/2021/12/cable-news-ratings-2021-fox-cnn-1234899789/

Goldman Sachs highlighted cash was building in Q4. https://www.cnbc.com/2021/12/16/big-wealth-investors-are-likely-to-put-money-to-work-in-stocks-after-amassing-record-levels-of-cash.html

What is a Black Swan https://tradebrains.in/black-swans-investing/

Disclosure

All investments involve risk, including possible loss of principal.

The material provided here is for informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Toroso nor any of its affiliates guarantees any rate of return or the return of capital invested. This commentary material is available for informational purposes only and nothing herein constitutes an offer to sell or a solicitation of an offer to buy any security and nothing herein should be construed as such. All investment strategies and investments involve risk of loss, including the possible loss of all amounts invested, and nothing herein should be construed as a guarantee of any specific outcome or profit.  While we have gathered the information presented herein from sources that we believe to be reliable, we cannot guarantee the accuracy or completeness of the information presented and the information presented should not be relied upon as such. Any opinions expressed herein are our opinions and are current only as of the date of distribution, and are subject to change without notice. We disclaim any obligation to provide revised opinions in the event of changed circumstances.

The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Toroso or its affiliates or any of their officers or employees of Toroso accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Toroso. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of and observe such restrictions (if any).

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