Kelsey Ellsworth
AVP Wealth Portfolio Manager | Johnson Financial Group
As Assistant Vice President, Wealth Portfolio Manager, Kelsey works with clients to achieve their unique goals and objectives.
Investment Commentary
How We Seek to Build Resilience into Long-Term Portfolios
4 minute read time
Markets have consistently declined over the past few weeks as a result of the Russia and Ukraine conflict. However, major equity indexes posted positive returns on Thursday and Friday of last week.
Specifically, markets largely unwound the initial reaction of Russia’s invasion, safe haven currencies lost ground, and Treasury yields rose. The Dow Jones Industrial average finished with its best day of the year after Russian leadership agreed to meet with Ukrainian officials, suggesting that Putin is open to negotiations.
However, new developments will likely lead to continued uncertainty and volatility will continue as the market digests new risks that develop. It is natural to feel nervous during periods of uncertainty and chaos as we watch from the sidelines. Investors sometimes find it hard to stand idle. However, we must be reminded that good portfolios are built to withstand unpredictability and markets are resilient over the long term.
Risk Factors
Heading in to 2022, our outlook included continued positive growth, though we also recognized risk-inducing factors including geopolitics, pandemic concerns, earnings growth, and Fed policy. We build these risks into our outlook when constructing portfolios. While geopolitical risks have taken center stage over the past few weeks, some of our other risk factors have taken a backseat and are readjusting.
The Fed is on pace for its first rate-hike in March. A risk to our outlook was that the Fed would hike over-aggressively in response to growth and inflation, which would squeeze risk assets. Over the past few days, the probability of a 0.50% rate hike has dwindled down to about a 25% chance from a high of around 80%, and the number of anticipated rate hikes this year has also been reduced.
Earnings growth was also strong for the fourth quarter of 2021. Stocks are down this year due to lower price to earnings ratios—not poor earnings. P/E led bear markets tend to see V-shaped rebounds.
Lastly, consumer spending rose 1.5% in January despite the Omicron variant, a sign that inflation is largely supply-chain driven rather than demand-driven, but we will continue to monitor whether higher oil prices affect spending going forward.
On an ongoing basis, we monitor how these risk factors play off each other and seek to make changes within portfolios when opportunities arise.
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Looking Longer-Term
When markets are turbulent, the natural inclination is to do something—but historically speaking, doing nothing is the best bet. The chart below, which was mentioned in our recent market call, illustrates equity returns, as represented by the S&P 500 Index, during major events and bear markets.
It’s important to keep these seven events in a larger context. For example, when using our financial planning tools, we run scenarios to “test” portfolios should outsized events occur—and these are just seven of those scenarios. The graph reminds us that if we stick through these uncertain times, we can come out the other side oftentimes better than before and without dampening the success of our long-term goals.
The adage “time in the market vs. timing the market” rings true as empirical data points out that over the last 20 years, 24 of the 25 worst trading days occurred within one month of the 25 best trading days. We saw this concept play out last Thursday and Friday after prior market declines. By staying invested, we can capture some of the best trading days in history.
Strategic Allocation
So, before making any reactionary changes to portfolios, it is important to revisit how and why we invest in the first place. Strategic allocation refers to our long-term views and translates to the breakdown of the portfolio between stocks, bonds and complementary asset classes.
For investors with shorter time frames (often just a couple of years) bonds help to manage risk as they add protection on the downside. Over the longer-term, higher interest rates will be a positive for bond investors. For those investors with longer time horizons (five or more years), we often seek higher allocations to equities because there is plenty of runway to make up for market downturns and there is greater opportunity to earn higher returns that equities have historically posted.
The phrase, “stay the course” refers to the strategic allocation of the portfolio. This is the allocation we expect to best help achieve your long-term goals. It takes in to account each investor’s unique situation.
We also recognize that volatility brings with it investment opportunity. Tactical asset allocation involves deliberate short-term deviations to take advantage of market dislocation. Sticking to a long-term plan and having a disciplined investment process will help weather the storm.
We understand the pain that can come along with volatility, but by reminding ourselves that resilience is built into good long-term portfolios, we can better achieve our future goals.
This information is for educational and illustrative purposes only and should not be used or construed as financial advice, an offer to sell, a solicitation, an offer to buy or a recommendation for any security. Opinions expressed herein are as of the date of this report and do not necessarily represent the views of Johnson Financial Group and/or its affiliates. Johnson Financial Group and/or its affiliates may issue reports or have opinions that are inconsistent with this report. Johnson Financial Group and/or its affiliates do not warrant the accuracy or completeness of information contained herein. Such information is subject to change without notice and is not intended to influence your investment decisions. Johnson Financial Group and/or its affiliates do not provide legal or tax advice to clients. You should review your particular circumstances with your independent legal and tax advisors. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared. Past performance is no guarantee of future results. All performance data, while deemed obtained from reliable sources, are not guaranteed for accuracy. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses. Certain investments, like real estate, equity investments and fixed income securities, carry a certain degree of risk and may not be suitable for all investors. An investor could lose all or a substantial amount of his or her investment. Johnson Financial Group is the parent company of Johnson Bank and Johnson Wealth Inc. NOT FDIC INSURED * NO BANK GUARANTEE * MAY LOSE VALUE
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