(Morningstar Investment Management) Nearly every investor nods sagely in agreement with Warren Buffett’s famous maxim of being “fearful when others are greedy and greedy only when others are fearful”. Living it, of course, is an entirely different proposition.
So far in 2022, the U.S. equity market is down approximately 20% as measured by the S&P 500. U.S. Big Tech, which is comprised of the financial powerhouses that have been at the epicenter of innovation and growth for the broad U.S. economy—indeed, the global economy—for the past several years, have fallen particularly hard. And bonds have offered no solace, in a reversal from prior trends. With inflation eating away at purchasing power and interest rates accelerating higher, the Bloomberg Barclays US Aggregate Bond Index, which represents the core U.S. bond market, is down just over 10% for the year-to-date stretch through the end of June.
It remains to be seen how investors en masse will respond to this climate, but evidence from past downturns isn’t encouraging. In fact, Morningstar, Inc.’s investor returns study called “Mind the Gap”—which approximates the return of the typical investor as measured by flows in and out of a particular asset class—consistently indicate that investors time their buys and sells poorly, and the timing in more volatile asset classes is especially weak.*
But if staying the course is the recommendation, how can investors do so—or even commit more capital—when uncertainty is so high and trailing returns across asset classes are suffering a setback?
In our mind, it’s a matter of perspective. Every investor, even the professionals, invest for one primary reason: to meet individual financial goals. In fact, we are all goals-based investors. And as such, we should focus less on day-to-day, month-to-month, or even year-to-year gyrations and more on how each portfolio is progressing toward its goals.
Of course, when economic headlines are screaming about punishing conditions, and trailing returns have red ink, those financial goals can lose their primacy or even feel out of reach.
If retirement feels a bit further away or less secure today than it was six months ago, it’s worth remembering market history. Over the course of two World Wars, crushing 1970s stagflation, 9/11, a recent global pandemic, and countless other unpredictable and terrifying events, both equity and fixed-income markets have been able not only to recover from losses but have managed to grind their way higher. Today’s uncertainty is unlikely to be the first to disrupt that trend.
That’s not to say market losses aren’t an opportunity to reassess whether your particular portfolio is the right one for your stated financial goal. Market losses feel easy to weather during periods of calm, making excessive risk-taking tempting, even for goals with short time horizons. During periods of downturn, however, losses become more vivid. With that in mind, today’s environment is a good one for conversations with your financial advisor to ensure portfolio fit. You’ll likely find you are well suited to stay the course.
While we recommend a sit-tight policy for end investors, let’s be clear: we aren’t taking the summer off. As valuation-driven managers of the Morningstar Managed Portfolios, we analyze prices and market conditions daily, aiming to buy securities as they dip below our estimates of fair value while also spreading the portfolios across a range of securities that should respond with varying magnitude to different economic environments. These efforts aim to minimize severe loss relative to the mandate of each given portfolio while also positioning the portfolios to take advantage of lower prices and the improved forward-looking returns that we believe can result from better valuations.
Indeed, from our vantage point, better yields across fixed-income and lower-valuation multiples within equities make markets more attractive today than they were a year ago.
We’re not calling the market bottom—we have no expertise in that, and I can’t help but note that no one else does, either—but we are carefully and judiciously averaging into the opportunities that we believe are emerging today. Those include the broad U.S. equity market, which, as valuations fall amid the prevailing sell-off, is finally starting to look a bit more attractive today than it has for several years.
To bookend the discussion with another famous sentiment about frightening times: the only thing we have to fear is fear itself. And in this case, we can’t let those doubts push us into poorly timed changes or missed opportunity.
As always, we value your trust in us and manage portfolios with you and your goals in mind.
