I have lived through Black Monday, the Tech Bubble, the Great Recession, the Credit Crisis, a COVID pandemic that shut down the world’s economies, and several other choppy markets along the way. The reality is these bumps in the road create short term problems for investors, but they have less impact over longer periods of time. Still, volatility is hard to ignore. This is especially true when we are within a few years of retirement and we feel there is little room in our plan for a 20-30% decline in the markets, even if it might be short lived.
We all approach challenges differently. For me, I like to know what my choices are. At a restaurant, I ask what the waitress recommends, because I want to hear her ideas. Usually I order something else, and it may seem like I wasted her time, but I often feel better about my choice when I know what my options are. Investing is similar. If we have a worry that our account might lose more than we are comfortable with, we have to know what our options are for managing that risk.
One solution I offer to clients is to use options to generate extra income or protect against losses. I have been using these strategies for over 20 years. Even so, I don’t know it all, but I know enough to be careful. Options are not for everyone and it takes time for clients to learn how options work and what to expect. And for this reason, I often start working with new clients on a smaller scale, if they express and interest in having me generate income, or offer protection from market risk. The result is that some clients may find greater comfort, especially if they have a higher allocation to stocks—often a more volatile type of investment—in their account.
There are several challenges on the horizon, including fears of recession, continued inflation, conflict in Ukraine and the Middle East, China’s and Russia’s relationships with the rest of the world, and the upcoming Presidential election. Like so many other challenges, these may also prove to have little impact on the markets. We expect our investment decisions will be fruitful and having the proper asset allocation will provide us with a smoother journey. And we will continue to buy high quality companies, expecting them to weather difficult times, and thrive when times are good. But if your concerns get the best of you, please let us know. There is no bad time to review your portfolio, and to make sure we are doing what we can to make the journey better for you.
~ Steve Davenport, CFA