Back to the Basics - Investing Amid Market Turbulence

The Federal Reserve Bank (the “Fed”) governors just concluded their annual trip to Jackson Hole. The trip was punctuated by a rather “hawkish” press conference by Chairman Jerome Powell where he emphasized a concern over inflation and the group’s commitment to focusing on it until “the job is done.” The equity markets wobbled in response as investors internalized that another 75 basis-point rate hike was likely in store for September with potentially more to follow. Fed actions have contributed to significant market volatility of late and it appears we have more to come. We can’t control Fed action and short-term market pullbacks, but market volatility provides an opportunity to get back to the basics and revisit some “tried-and-true” ways to add value to portfolios.

One potential area to add value is to take advantage of free money as we will discuss below. Traditional IRAs, Roth IRAs, 529 Education Savings Plans and employer retirement plans are all areas of opportunity. For one, many investors have the potential to reduce taxes (i.e., lower taxable income) or get free money (i.e., employer contribution matches) by contributing to retirement plans. If this is an option for you, it should be taken advantage of as it represents one of the best sources of return in investing. Moreover, most of these plans can appreciate without incurring taxes each year (i.e., taxes are deferred until contributions are withdrawn). By deferring taxes, one is typically able to then reduce taxes because a deferral provides more flexibility for tax-mitigation strategies over time. Also, often one will be taxed in retirement at a lower tax rate than they are taxed in their prime earning years. It’s never too late to add to retirement accounts and the government has many “catch up” provisions for late starters. For example, those over 50 can contribute larger amounts to IRAs (i.e., $7,000/year) and 401ks (i.e., $27,000). Business retirement plans typically provide tremendous opportunity given the annual contribution limits are substantially higher than individual plans. Patina Wealth can assist in setting up business retirement plans if this is of interest.

Another key area of focus for turbulent times is to continue adding to investments. The equity market has proven to be a great investment in the long-term but can be subject to significant short-term drawdowns. Market drawdowns can present a buying opportunity. For those with annual salaries, it is important to continue to add to investments through drawdowns as it lowers the average “cost basis” of investments and leads to better long-term performance. This tactic can be deployed by increasing one’s discretionary savings rate (i.e., increase the portion of salary that is set aside for long-term investing) or simply by continuing to invest through retirement plans which more typically pull money and invest it on a set schedule. Similar, if it is financially feasible, one could consider “reinvesting dividends” across all investments rather than receiving them which will have the effect of buying more shares.

Of course, one of the best defenses against market uncertainty is to have a broadly diversified portfolio with varying risk exposures and tailor portfolio holdings based on individual needs. At Patina Wealth, we build custom portfolios and diversification is more than simply investing in stocks and bonds as we take an active approach. On the equity front, our models will, at times, call for an overweight to certain sectors as well as certain “factors” (e.g., value, growth or quality). By overweighting sectors and factors, risk-adjusted performance can be enhanced.  Moreover, on the fixed-income side, we are active in managing bond risk (e.g., investment grade versus high yield) and “duration” (i.e., effective time to maturity for portfolios). By strategically adjusting risk and duration one can often mitigate drawdowns and provide opportunities for capital gains. Volatile markets can be stressful, but they also present an opportunity. So, keep looking for ways that you can strengthen your financial situation amid the turbulence.