They don’t want to hear it

Happy Friday!

I discussed five points that may help clients maintain perspective during times like these. Hard to say how clients will react, though. Hoping this calms a few down, but invariably there will be that “all you say is stay the course” cohort who will have a hard time accepting anything other than negativity. 

Those three words no client wants to hear

Speaking of “staying the course,” those words are often mischaracterized.  Often, recipients of this sage advice hear this instead: “They aren’t adapting to this market and refuse to see the writing on the wall” or “they are asleep at the wheel and not making any changes in my portfolio.”

However, what it’s really meant to suggest is to “stick to the strategy.” Since there is no such thing as passive asset allocation, we can extend this to “stick to your actively managed strategy.”

And, if that strategy appears to be working (any allocator knows it takes more than just recent price momentum to determine if a strategy is still sound), then don’t mess with it. Said another way, stick to the actively managed strategy until it’s no longer operating as expected.

In summary…

  1. If a strategy is predicated on fundamental analysis or some other set of factors
  2. And those fundamentals or whatever else confirm the strategy is still on track
  3. Then to adjust or change course simply because external noise is causing panic creates MORE risk, not less.

It sounds counterintuitive, but to change a strategy simply because of volatility can send clients off track. 

Now, the pushback here is what does it take to change a strategy, which is a valid question. The answer is when the fundamentals are there, but the strategy isn’t acting as expected. It may sound like I’m splitting hairs here, but it’s a critically important nuance.

I Bonds

There’s been a lot of hype on I Bonds since their interest rate reset last November. Lately, that interest seems to be growing by leaps and bounds, but I’m not sure these are some financial saviors right now. 

Don’t misunderstand. They’re fine to own and crush anything out there right now from a yield/safety perspective. But a couple issues here:

  1. You are capped at $10k/year per SSN. You can also purchase an additional $5,000 per year with your tax refund. So, it’s not going to move the needle short term. If you have 20+ years to retirement, then start maxing out. But over the next year, you aren’t going to yield enough to pay for a bad night out in Miami.
  2. You can’t cash in the first 12 months after purchase. And thereafter, if you redeem before the 5th anniversary of your purchase, you will pay a penalty equal to 3 months’ worth of interest.
  3. You can only buy and redeem I bonds through the Treasury Department’s website. When someone wants to cash in I Bonds to invest elsewhere, it takes longer than swapping out investments in the same account (it may not matter but just wanted to point this out).

Personally, I prefer other inflation hedges like stocks with pricing power and, of course, stuff like this…

What better way to stomp inflation than by owning a fractional share of a rare sneaker!

Keep an eye on housing

I’ve been a fan of Bill McBride for a long time. His analysis is top-tier, and he doesn’t ramble (it takes about three minutes to read most of his work). 

He gained fame during the GFC because he basically called it and did so by looking at the housing market. His point is that we aren’t on recession watch just yet, but keep an eye on housing. Here’s the conclusion from a blog post back in March:

“If the Fed tightening cycle will lead to a recession, we should see housing turn down first (new home sales, single family starts, residential investment).  There are other indicators too – such as the yield curve and heavy truck sales – but mostly I’ll be watching housing. (I’m not currently on recession watch)”

I tend to agree here, but like I’ve said before, no single indicator can call a recession. There are no trigger switches or lines in the sand. It takes careful analysis of a handful of indicators to determine if there is any correlation and/or causation amongst the various drivers of those indicators.

Enjoy the weekend…