Rocky Mountains & Rocky Markets

May 20, 2022

I’m writing this post on May 19, 2022 as I sit in the Denver airport, on my way back home from a Schwab meeting in California. And admittedly, I’m experiencing a very strong sense of deja vu.

The last time I was in the Denver airport was February 2020. I was on my way to visit clients in Tuscon just as the COVID pandemic was taking hold in the US and striking fear in the US equity markets. During my layover in Denver, I wrote a very similar blog post to the one I’m about to compile for you today.

If you think back to those days a little over two years ago, markets were in free fall, the world and its future were uncertain, no one knew what to think about the path forward, and it seemed like things would never get better. Sound familiar?

It strikes me just how much has changed since the last time I was at the base of the Rocky Mountains, waiting for a plane, and penning an update on “Rocky Markets” – and yet, how much remains the same. They always say history doesn’t repeat but it does rhyme – and that certainly rings true today.

After a rocky week in the markets (and an overall jarring start to 2022), here I am once again, sharing my perspectives with you. As I did in 2020, the only thing I can do to bring context to this time of confusion and concern is to share with you a few things I know for sure.

1.)   Volatility is the price we pay for the opportunity

While it may not feel like it lately, investing is an opportunity. An opportunity to compound your wealth over time and ultimately provide the cash flow needed to live your life once you retire. For the vast majority of us, if you were to take your current savings/investment balance (the numerator) and divide by our annual cash flow needs including inflation (the denominator), it is unlikely the answer would equal or exceed our life expectancy. And yet, if we apply an annualized rate of return to that current savings number over time, the math usually works. Investing allows us to reach our goals, working in the background as we pursue careers, raise families, and live our lives. That opportunity comes with some costs – and one is volatility. Markets do not go up in a straight line – and they don’t need to in order for our goals to be met. We just need to stay open to the opportunity.

2.)   Liquidity stores provide protection

For Windermere clients currently living off their portfolios, we have structured your allocations to provide sufficient liquidity to cover at least 3-5 years of cash flow needs (from cash, short duration fixed income balances and portfolio income).  And for clients not yet living off their portfolios, we have also worked together to ensure sufficient cash outside of your investment portfolio to pay for unexpected expenses or replace income in the event of job loss.

This is not accidental. Having access to liquidity prevents you from having to liquidate other more volatile investments in a downward move. It prevents you from reacting. It allows you to live your life as planned.  It allows you to be patient.  It allows you to stay the course.   

3.)   Everyone has an opinion.  No one has a crystal ball

Media has a job to do – never forget that.   They are in the business of attracting attention and increasing click-thrus and viewership so they can sell more advertising.  Flashing red numbers, prime time specials, and sensational headlines that spark fear and concern tend to get the attention they seek.  It was not all that long ago that these stations were broadcasting a Bitcoin price ticker and a countdown to Apple reaching $3 trillion market cap – all designed to capture attention. And now, reports of the sky falling achieve the same objectives.

Professional money managers also have a job to do and an accompanying set of opinions. Whether it is Warren Buffett, Cathie Wood, David Tepper, Bill Ackman, or countless others – they are managing their portfolios in accordance with their research and resulting convictions – and benefit personally from having others believe them. There media appearances are not meant to be solely educational and they certainly do not know the future. No one does.

We know for sure that everyone (including you and us) has an opinion.  But no one can predict the future.  Focus on what you know and don’t mistake opinion and panic for fact.  

4.)   Remembering the good is essential

In times of stress, we focus in on negative items, like the decline in our balances, the fear that things will never be good again, and an endless loop of hindsight (“if only I would have…”). And we wholly dismiss all the progress that has been made and our aggregate financial picture.

What good are you forgetting? Did you change careers in the past few years and increase your lifetime earnings potential? Were you able to take advantage of historically low mortgage rates and decrease your monthly spending? Did you benefit from the government stimulus payments, either personally or in your business? Did you redeploy student loan payments to other spending? Were you able to rollover an IRA to a Roth? Did you and your family come out of a global pandemic healthy, happy, and in the best financial shape of your life?

I am hopeful you made a lot of progress in the past two years, especially when taken in the context of a global pandemic. Please do not dismiss all of that so easily.

5.) Wealth effect distracts our focus

We simply feel better when our investments and net worth balances are rising. We feel more secure and more confident – and many times, those positive emotions will lead to us spend more (known as the wealth effect). The reverse doesn’t feel nearly as good but in reality, in the vast majority of cases (and I personally know this is true for myself and Windermere clients), all that has changed is the number on the page. The wealth effect distracts us from the here and now – try to stay focused.

Careers are moving forward. Life is still in motion. Expenses can still be paid. Cash flow is still supportive. Are the numbers on the page lower? Yes. Does that impact current life today? No. Is it fair to worry about the impact of that on the future. Yes. Is it likely everything will resolve and longer term plans can still be attained? Also yes.

6.) Volatility presents opportunity

While a downward market feels terrible, it does present opportunity. Tax losses can be harvested in taxable accounts. IRAs can be converted to Roth. Portfolios can be upgraded (ie: selling one position for another with better prospects moving forward). Planned savings for the year (via employer plans, IRA contributions, taxable accounts) can be deployed into a market “on sale.”

The businesses underlying the equity markets are doing the same thing. Many are buying back their own shares at these levels, recognizing the value presented

No one knows when the near-term bottom is – but there are actions that can be taken over time to take advantage of these times.

7.)   Investing remains a matter of choice

Investing has always been about choice – where do you choose to put your capital to meet your long term goals? For the vast majority of us (myself included), leaving all of our invested capital in cash and fixed income in today’s rate environment (even after rate increases) will not allow us to meet our goals.  The returns are just too low, especially when today’s inflation is taken into account.

Today and every day, you have a choice to make between the various investment alternatives.  The one you choose is ultimately up to you but always remember, every choice you make comes at a price (whether it be increased volatility or lower expected returns over time).

We understand and appreciate the uncertainty.  We are processing it and coping with it right alongside you.  When faced with something we aren’t able to fully understand or evaluate, it is most constructive to return to things we know to be true.  

Invest on and as always, if you have questions, please reach out.  You were never meant to do this on your own.




 Note: Above commentary as of publish date shown for blog post. All comments herein represent the opinions of Windermere and its principals. It is for educational and information purposes only and should not be relied upon as investment advice. Please consult your financial advisor as it relates to your own investments and financial planning

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