2022: The Perfect Storm for Emotional Investment Mistakes

Investors with broader stock and bond market index exposure are experiencing unusual amounts of pain in 2022 with the indexes down approximately 21% and 15% respectively. While the correction in the broader stock market after a 12-year bull run is not surprising, the poor bond market performance is. Investors are accustomed to the “stock market down equals bond market up” dynamic.  The fact this inverse relationship is not holding true in 2022 creates serious doubt for many and a perfect storm environment where emotional-based decisions can thrive. Let’s touch on some disciplines to help regain confidence in your portfolio and potentially avoid the negative outcomes that emotional responses can lead to.

For weekly insights, follow The Welch Group every Tuesday morning on WBRC Fox 6 for the Money Tuesday segment.

Always Assume You May be Wrong

There are no guarantees in investing and all decisions are based on probabilities of various outcomes. Regardless of your conviction about the broader market or a particular stock, exposure to assets that go against your market thesis is a must. The best money managers accomplish this through asset class allocation, internal asset class selection, and rebalancing within asset classes which we’ll get into below. Rarely do you see the best investors make extreme bets during periods like 2022 as they are never 100% certain about outcomes.

Understand What you Own and Why

The most common way investors get in trouble is inappropriate asset allocation (i.e., stock to bond ratio) and owning the wrong assets within those asset classes. For example, if you are a younger investor and have no reliance on your investment portfolio for cash flow, exposure to more growth oriented/highly volatile stocks may be appropriate. On the other hand, if you are a retiree and reliant on your portfolio for cash flow, then safe and highly liquid assets such as bonds with less exposure to inflation or stable stocks with proven performances can be appropriate.

Recommendation:  Review your portfolio and understand what you own and why those assets are appropriate for your current life situation.

Develop a Sell-Side Discipline

All seasoned investors have detailed processes and disciplines to help them generate consistently solid returns. While understanding what you own and why you own it is important on the buy-side, it’s also important on the sell-side to help ensure profits are protected and money is going where the deals are.

In this current environment, it’s essential to understand what may have worked as an investment in both 2020 and 2021 is not working in 2022 (i.e., technology stocks and long duration/lesser quality bonds). It’s also important to recognize those positions that did not work in 2020 and 2021 (i.e., energy stocks and short duration/higher-quality bonds) may be doing better in 2022.

Recommendation:  Develop a sell-side discipline that forces profit-taking and reallocation of capital. Remember, money wants to flow where it is treated best so help it get there.

Every situation is unique. Be sure to consult with a financial planner to discuss your portfolio and investment goals to determine the best course of action for you.

 

Marshall Clay CFP, J.D., is a Partner and Senior Advisor at The Welch Group, LLC, specializing in providing Fee-Only investment management and financial advice to families throughout the United States. Marshall is a graduate of the United States Military Academy in West Point, New York, the Cumberland School of Law in Birmingham, Alabama, and is a CERTIFIED FINANCIAL PLANNER™. In addition, Marshall is a frequent guest on local television stations as an expert on various financial planning matters.

 IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by The Welch Group, LLC –(“Welch”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Welch. Please remember that if you are a Welch client, it remains your responsibility to advise Welch, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Welch is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of Welch’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request or at www.welchgroup.com. Please Note: Welch does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Welch’s website or blog or incorporated herein and takes no responsibility.