June Client Update Fear & Loathing in the Financial Markets




Good Afternoon, Well, it’s been a rough start to the year for the financial markets and it is showing up in our investment accounts. I am sure that this may have you feeling FINE (frustrated, insecure, nervous and exhausted.) In recovery, it is advised to HALT before making decisions. This means avoiding making decisions when hungry, angry, lonely, or tired. And I would add that when it comes to investing, avoid making a GAF. This means avoiding making investment decisions when greedy, angry, or fearful but remember GAF is what sells media. Declines in account values have been steeper than anticipated so far this year because all major asset classes are down which has limited the benefits of diversification. There have really been few places to hide. Cash remains unattractive except as a safe haven but is getting crushed by inflation, bonds are down due to increasing interest rates, stocks have been on a significant slide all year, as well as most commodities. The news media is peddling fear like peanuts, popcorn, and hot dogs at a ball game. The constant drumbeats about a recession are like Chinese water torture prognosticating that there is a 30% chance of a recession next year. They act like we are already in a recession, but we aren’t even close, and lost in translation is that there’s a 70% chance we won’t be in a recession. Yes, there are a lot of worries, of course, there always are and some would say this time is different. National dissent, geopolitical risk, wars and rumors of wars, drought, fires, massacres, environmental catastrophe’s imminent recession, another Jan 6th, etc.… I also think what the heck is this world coming to. Perhaps the circumstances and characters are different, but history always rhymes. The economic cycle of expansion, peak, recession, and trough repeats again and again while the economy and financial markets reset and go on to new highs. We have seen this many times before and have learned how it will potentially play out. Patient investors who are focused on their financial plan, believe in their investments, remain diversified, and understand their risk can in the end be rewarded. As a pilot, the thing we must do is fly by our instruments when we can’t see the ground below or the flight path in front of us. Our instruments include investing according to a well thought out financial plan which may result in a high probability of success of a certain retirement goal, being diversified among several high-quality investments that have a track record of success, managing risk, being tax-aware, practicing patience and not feeding into the fear and panic caused by the media and our emotions or succumbing to the temptation of making the big mistake of selling low and buying high. If this was easy, everyone would be wealthy and stay that way but as you can see that is just not the case. Many clients have said yes David, I understand about long-term investing, but I am older now and how long do I really have to recover, and I am not adding to my investments anymore. Well, that may be true but I would say that you may very well have 20+ years and anything five years or more is considered long-term when it comes to being an investor. And over five-year rolling time frames since 1950 a diversified, moderate risk portfolio of 50% stocks and 50% bonds has not lost money. See the attached charts from J.P. Morgan on Time, Diversification and The Volatility of Returns and Diversification and The Average Investor. Plus, you must think about when you will actually need to spend the money. If it’s next week, next month or next year then put that amount safe. If it’s going to be consumed conservatively over time and potentially passed on to future generations or charity, then your investment time frame may be a lot longer than you think. In addition, there’s a behavioral finance term called recency bias. That describes the temptation to extrapolate into perpetuity your most recent experience. It goes like this, say your accounts declined 10% last month, which some did, you may reason that if this continues then I will be out of money in 10 months! That’s just not true because that’s not how proper investing works, and you know this although I hear it quite often. Although investing is sometimes likened to gambling, it’s not, if done right and I believe that in my practice we do it right! This recency bias may be true in blackjack, roulette, or slot machines where you are a gambler but with quality stocks, you are an owner, and quality bonds a lender. As a diversified investor, you own many of the greatest companies in the world that make products and services that people use all over the world every day and so these companies have value and most of them will survive and thrive over many market cycles. Plus, some of these companies are attractively valued and this is not lost on your managers. Your investment managers will occasionally rebalance their portfolios and this can help your investments not only recover but profit in the long run. This simple technique of rebalancing is the essence of buying low and selling high. This is like planting little portfolio seeds that take time to mature into something good. You can’t plant a seed today and expect a harvest tomorrow but with patience, you can be rewarded. In times like this we are reminded that the stock market takes the elevator down and escalator or stairs up. One client said it’s more like the Tower of Terror Down, which is a ride at Universal. And I must agree with him along with his other remarks that it is just so aggravating and painful to see such a dramatic and precipitous loss and it is so much! And so, I know the feeling and am experiencing the same results as I own many of the same investments that you own. Although I am looking out for ways to capitalize on this as I am for you as well. So don’t be surprised if I suggest ways for you to take advantage of the downturn where I see potential as well. That’s the bitter pill of investing, buying, or rebalancing at a time when everything in us says, ‘NO!” I suspect that we might see some recovery over the balance of this year. And if not then we will manage through whatever comes. An interesting contrarian indicator is suggesting that this is a great time to be patient and stick with your investments and financial plan. The American Association of Individual Investors (AAII) puts out a sentiment survey every month. AAII surveys thousands of members by inquiring if they are bullish, bearish, or neutral on the stock market over the next six months. Bearish means they think it will go down, bullish means up, and neutral sentiment means they expect stocks to be flat. Right now, the AAII survey results are showing the lowest level of investor optimism in nearly 30-years. See for yourself in the attached article. And when sentiment is as bad as it is now then we believe it is typically a great time to invest or stay invested. Unusually high bearish sentiment readings historically have also been followed by above-average and above-median six-month returns in the S&P 500. Individual inventors, left to their own accord, often get it wrong. Historically, it is not timing the market that generates decent long-term returns, it’s time in the market. And if you could time the market, getting in and out at just the right times, then everyone would be wealthy and stay that way. But again, this is a fool’s errand because if you miss the ten best days in the market over the long term you will cut your potential returns in half. Time in the market has been more important than timing the market. Current recession risk indicators suggest that the economy is not as bad off as people think. Although we have seen some deterioration in leading indicators most are still in good shape. I have shared this data with you before, but the Clearbridge Investments Anatomy of a Recession piece is still mostly green and the CNR Economic Speedometers are as well. Those two pieces are attached along with their analysis of the current financial conditions and outlooks. I know that there is a lot here and I appreciate your time to read this letter. I welcome your calls and inquiries if you feel nervous and anxious about your investments and the future. You should call or write, and we should set up some time to talk about it and evaluate your plan especially if there’s anything changing with regards to your income needs, retirement plans, employment situation, or need for a large withdrawal. Please don’t ever think, as some have shared, that you are bothering me or that we don’t have the time for you. You are important to us and we’ll make the time. Take heart, as another client said to me recently, “what goes up must come down, what goes down must come up” and I will add that this too shall pass. As always, thank you for your business, we don’t take it for granted and are here for you whenever you would like to talk. Important Disclosures: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly. Examples are hypothetical and are not representative of any specific investment. Your results may vary. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that the strategies promoted will be successful. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss. David J. Blount CERTIFIED FINANCIAL PLANNER ™ Investment & Insurance Planning Services, LLC 992 Palmetto St. Oviedo, FL 32765 407-719-0940 www.davidblountIIPS.com dblount@davidblountIIPS.com

Securities offered through LPL Financial, Member FINRA/SIPC

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