Investors have recently witnessed some of the worst trading days since 2020.
Stocks tumbled in September on fears that the Fed’s aggressive rate-hike cycle will cause the economy to stall, but with more hikes to come, along with slowing growth, geopolitical instability and lingering inflationary pressure, this it could be an extended period of market uncertainty and volatility.
And yet there are “opportunities” even now, he said. Ronald Albahary, Chartered Financial Analyst and Chief Investment Officer of Wetherby Asset Management, who was ranked No. 20 on the CNBC FA 100 list of the best financial advisors for 2022.
Perspective is key, according to Albahary. “There are some relatively easy things investors can do to take advantage of this environment,” she said, “if you can see through the fog of negative sentiment.”
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“The Federal Reserve has made it perfectly clear that its number one goal is to squash inflation,” said Mark Mirsberger, certified public accountant and chief executive officer of Dana Investment Advisors, No. 2 on this year’s CNBC FA 100 list, even if that means that “they lead us into a recession,” he added.
“Right or wrong, that’s where we’re going.”
Rick Keller, a certified financial planner and president of First Foundation Advisors, was ranked No. 33 on the CNBC FA 100 list, He also said he sees “the positive side” of the current climate. “It’s usually darkest before dawn,” she said.
Keller relies on the “bar approach” to hedge against uncertainty in the face of rising rates and the possibility that the market still retraces 10% or more.
The bar approach is an investment strategy that seeks to find a balance between risk and reward by investing in high and low risk assets and avoiding more medium risk options. Keller’s clients have half of their fixed income allocation in long-term bonds and the rest in shorter maturities.
“If we see the market drop another 10% to 20%, that will be an extraordinary buying opportunity,” Keller said.
Here are three strategies top-ranked advisors are using to guide their clients through the recession:
1. Create a diversified portfolio
“If you were 60% or 70% in stock, cut it down to 40% or 50%,” Mirsberger advised. “The bond side may carry more weight because there is less volatility and more opportunity.”
As for stocks, stick with the best companies in a variety of sectors. Look for “strong brands,” she said, “like Microsoft, Google, Amazon Y Facebook — we still see value in these perennial growers.”
“The market sell-off has been indiscriminate; quality companies will recover faster than others,” Mirsberger added.
The liquidation of the market has been indiscriminate; quality companies will recover faster than others.
Mark Mirsberger
CEO of Dana Investment Advisors
For his clients, Keller also recommends reducing exposure to emerging markets, stick with high-quality stocks and diversify.
“I would like to remain very diversified here because in the end it is difficult to choose one sector over another and the prices are low enough,” he said. “If you’re thinking three to five years, you’re going to make a lot of money.”
2. Focus on fixed income
Since the Fed raised rates, Treasury yields have soared. “The good news is that you can now earn income from your portfolio or very conservative Treasuries,” Albahary said.
what it does Short-term, relatively risk-free Treasury bonds and backgrounds suddenly more attractive.
“Savers have been punished for 20 years,” Mirsberger said. “This is really the first opportunity for what many would say is an acceptable level of return without a lot of risk.”
Albahary agreed that investors should shift some allocations to fixed income.
“Fixed income, which has been more ‘fixed’ than ‘income’ for too many years, is becoming more attractive,” Albahary said. “Now you get paid 4% or more for a risk-free asset, that’s kind of exaggerated,” she added, referring to an easy win.
Both advisers suggest scaling your Treasuries to ensure you get the best rates, a strategy that implies keeping bonds until the end of their term.
3. Crop losses
To take advantage of the recent sell-off, store those losses and use them to offset future gains.
“This is the time to reap those losses,” Keller said. “I think of it as money in the bank.”
Tax Loss Harvest allows you to offset investment gains and, if losses exceed gains, up to $3,000 of ordinary income. Anything left over can be carried over to future tax years.
“That puts a dollar in your pocket, versus 75 cents,” Albahary added.
Just be careful to avoid the “wash sale rule:” If you reinvest in a substantially identical investment during a period of 30 days before or after the sale, you can no longer account for the loss for tax purposes.
