So far, 2022 has been a year to forget for investors. Last week broader market indices such as the S&P 500 approached bear market territory with declines exceeding 17% from the beginning of the year. Pandemic-era stalwarts such as Zoom and Peloton were down more than 75% from their highs. Bitcoin was trading at less than half of its peak value, while meme stocks Gamestop and Bed Bath and Beyond are priced at less than a third of their highs.
It’s one thing for stock indexes, crypto, and meme stocks to be volatile, but it’s quite another for bonds to suffer declines. Most investors purchase bonds for safety and as safe havens from the volatility of equities. The idea is that bonds will enable us to psychologically endure the wild fluctuations in the stock market. But bonds wrapped up their worst quarter of performance in the last 40 years as measured by the Bloomberg Aggregate Bond Index, down close to 6%.
There’s a good explanation for this poor bond performance. The Federal Reserve began a series of interest rate increases given the persistence of alarming inflation numbers. While last year Fed Chair Jay Powell used the word “transitory” to describe inflation, the t-word was abandoned this year and the Fed’s inflation-fighting salvos were unleashed. Investment professionals speak of the bond seesaw. As interest rates go up, bond prices must go down to stay competitive.
With many asset classes down for the year, consider these steps to endure through a challenging stock and bond market environment.
Bond or CD ladder. Few investors enjoy a poor stock market, but those who are still working can still engage in some positive self-talk that they have more years to save and for their investments to turn around. Those who depend on their portfolio to support their monthly expenses now, whether they are traditional retirees or financially independent in their 40s or 50s, do not have the same silver lining. If you’re in your 60s, you need to plan on your money lasting for 30 years. For most investors, that requires some percentage of their portfolio in stocks for long-term growth and to keep up with inflation.
So how do you stay sane when markets are bumpy? A ladder of CDs or Treasury bonds that you purchase in a taxable or retirement brokerage account can do wonders for your mental state. A ladder means purchasing secure bonds and CDs that mature over a series of years to cover your living expenses. With three-year CDs paying more than three percent, having a ladder to cover the next few years of expenses will help you keep a longer-term perspective when retirement is right now.
Don’t check so much. Never has it been easier to monitor how much money you’ve made or lost on any given day. That can be unnerving if you have a $500,000 portfolio as your investments could easily decline by $10,000 on a rough day. Seeing your net worth decline by a five-digit number in a single day can freak out investors, yet it’s a necessary consequence of investing in stocks. In my experience, the more investors trade, the poorer their performance. Vanguard founder Jack Bogle captured this sentiment perfectly when he said, “Don’t do something. Just stand there.”
Be careful of anchoring. We have a natural tendency to fixate on the historic maximum level of our net worth. For many of us, any decline from that peak level of wealth is losing money. It doesn’t matter that our portfolio far exceeds its value from two years ago. The fact that it has declined since the beginning of the year is concerning to us. Remember that investing is a long-term endeavor that has paid off when exercising strategic patience.
Automate success. The best way to relax about your investments is to put in place a system that takes your best strategic thinking and then implements it in an automated fashion. Classic examples of this are retirement plan contributions that come out of every paycheck. If you max out your retirement accounts, consider regular deposits into a taxable account or Roth IRA if you’re eligible. Arranging for your accounts to be rebalanced every year or so will also help ensure your portfolio matches your ability to tolerate risk. Putting these plans in place while calm can help you sleep easier when the stock market doesn’t behave.
David Gardner is a certified financial planner™ professional at Mercer Advisors practicing in Boulder County. The opinions expressed by the author are his own and are not intended to serve as specific financial, accounting, or tax advice. They reflect the judgment of the author as of the date of publication and are subject to change.