Are your investments properly positioned for 2023?

By: Adam Taback, Chief Investment Officer, The Private Bank
Hands and arms of three people in business attire closely gathered at a table, discussing financial charts

Consider asking your advisors these questions today as you evaluate your investment strategy

Photo of Adam Taback
Adam Taback, Chief Investment Officer,
The Private Bank

Reboots are in. Movies, TV shows, and musical groups that were popular decades ago are getting another moment in the spotlight. But not all blasts from the past are entertaining or nostalgic, like recession.

The good news is that we’ve already seen this rerun — several times, in fact. While there are similarities here to the recessions of the 1970s and 1980s, and the Federal Reserve (Fed) is making decisions to avoid repeating mistakes made by policymakers back then.

As we look ahead to continued market movement in 2023, it’s a good idea to check in with your wealth or investment advisor. To get the conversation started, here are some questions to ask.

  1. How will changes in the economy and markets impact my investments going forward?
  2. Am I allocated in alignment with my investment plan?
  3. Am I on track to reach the goals we’ve established?
  4. Is my time horizon still reasonable?
  5. Are there any additional tools in the investment toolbox that we should be using to help navigate this volatility?

To help you prepare for a productive discussion, I have four recommendations.

Review what you own and how rising inflation and interest rates may impact your investments

How would I describe the markets today? One word: Tenuous. So much is going on. There’s an inflation battle ahead, and that’s not just a U.S. issue. This battle is happening worldwide, with a few exceptions (such as in China, which has a different challenge in the form of a growth problem).

So how may this impact investments you hold?

In the U.S., the Federal Reserve is serious about fighting this inflation battle by continuing to increase interest rates. In part, its intention is to slow the rate of inflation for consumers and in part it is to hold down labor costs for employers.

Commodity price pressures also are at play, due to imbalances in supply and demand. The conflict in Ukraine is a factor here, too.

On the other hand, we’re seeing good employment numbers and good savings numbers. From an investment earnings perspective, the economy is doing well. The impact we felt throughout 2022 is the market trying to find the hard balance between downward pressure on earnings and costs going up. We expect these difficulties to persist through the first half of 2023.

What’s unique compared to past recessions is the jobs picture — it’s difficult for people to imagine a recession with an unemployment rate at 4%. Unemployment is usually much higher in a recession. On top of that, people see restaurants are full, delivery trucks are at every door, and it’s hard to find a seat on an airplane —- which doesn’t look like a recession either. So, while things are a bit unpredictable, we think the Fed’s strategy is working. We’re not expecting a deep or long recession; we think things could clear up in the second half of 2023.

Consider how your investments may — or may not —need to shift during this period

Let me take the opportunity to discuss a couple of the typical concerns we hear from our clients.

The top concern is weak investment performance. Sectors that have been areas of growth over the past few years have lost ground. When investors feel a sharp pullback, it reminds them of the 2008 financial crisis — but, in our view, today’s pullback is nothing like that.

Rather than jumping to a more defensive approach, talk to your advisor about the quality of investments in your portfolio as well as your investment time horizon. Planning for potential financial needs —– such as when you might need to draw down your investments —- is particularly important in the current environment.

A second concern is how our clients are going to meet income needs. With interest rates rising, we see an increase in potential portfolio income-generating opportunities and now is a good time to discuss your current and upcoming income needs.

Discuss ways to help preserve your investments in the case of further market volatility

Even though we think the investment environment could improve in 2023, the markets will likely face more bumps in the road in the short-term. Some alternative investment strategies may add welcome diversification to your portfolio if you are under-exposed to this asset class. For example:

  • Returns on certain hedge fund strategies such as macro investing have enjoyed positive performance in 2022.1
  • In our view, new vintage private capital funds are well-positioned to outperform due to pricing changes in the market.
  • In real estate, private real estate investment funds likely will hold up better than public real estate in the current volatile market.

You also may want to discuss implementing additional downside portfolio preservation strategies. These may include option strategies as well as insurance considerations on equity positions.

Stay connected with your advisors to make sure your investment needs are being addressed

I believe the key to successful investing in the uncertain economic and market conditions in which we currently find ourselves is to be smart about the market and not try to be smarter than the market.

What does this mean for you?

It means making sure that you have an open dialogue about any concerns you have about risks to your investments. In volatile markets we often discover that our clients’ tolerance for risk is lower than they thought it was. Ask about strategies that may help reduce the risk.

If your circumstances have changed, such as when you may need draw down investments or generate more income from your investors, you can work together to adjust your portfolio and your investment plan.

And remember to ask about your tax exposure. You may find that you have opportunities to manage your tax exposure in this type of market environment.

The biggest takeaway? Ask questions of your advisors to make sure your plan works for you.

 

 

Footnotes

1. Source: Wells Fargo Investment Institute and Hedge Fund Research Inc., September 30, 2022.

Alternative investments carry specific investor qualifications which can include high income and net-worth requirements as well as relatively high investment minimums. Available to pre-qualified investors only.

Alternative investments, such as hedge funds, funds of hedge funds, managed futures, private capital, real assets and real estate funds, are not appropriate for all investors. They are speculative, highly illiquid, and are designed for long-term investment, and not as trading vehicle. The high expenses associated with alternative investments must be offset by trading profits and other income which may not be realized. Unlike mutual funds, alternative investments are not subject to some of the regulations designed to protect investors and are not required to provide the same level of disclosure as would be received from a mutual fund. They trade in diverse complex strategies that are affected in different ways and at different times by changing market conditions. Strategies may, at times, be out of market favor for considerable periods with adverse consequences for the fund and the investor. An investment in these funds involve the risks inherent in an investment in securities and can include losses associated with speculative investment practices, including hedging and leveraging through derivatives, such as futures, options, swaps, short selling, investments in non-U.S. securities, “junk” bonds and illiquid investments. The use of leverage in a portfolio varies by strategy. Leverage can significantly increase return potential but create greater risk of loss. At times, a fund may be unable to sell certain of its illiquid investments without a substantial drop in price, if at all. Other risks can include those associated with potential lack of diversification, restrictions on transferring interests, no available secondary market, complex tax structures, delays in tax reporting, valuation of securities and pricing. An investment in a fund of funds carries additional risks including asset-based fees and expenses at the fund level and indirect fees, expenses and asset-based compensation of investment funds in which these funds invest. An investor should review the private placement memorandum, subscription agreement and other related offering materials for complete information regarding terms, including all applicable fees, as well as the specific risks associated with a fund before investing.

Some complementary strategies may be available to pre-qualified investors only. Hedge strategies and private investments may be speculative and involve a high degree of risk. Hedge strategies and private investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. There is no secondary market for the investor’s interest in a hedge fund or private equity investment and none is expected to develop. There may be restrictions on transferring interests in a hedge fund or private equity investment.

There are risks associated with investments in private companies. Such companies are not subject to SEC reporting requirements and are not required to maintain effective internal controls over financial reporting. These companies may have limited financial resources; shorter operating histories; more asset concentration risk; narrower product lines and smaller market shares that larger companies. In addition, securities issued by private companies are typically illiquid and there may be no readily available trading market for such securities.

Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility.

Real estate investments carry unique risks including lack of liquidity and potential complex tax consequences and may not be appropriate for all investors.

There are special risks associated with an investment in real estate, including the possible illiquidity of the underlying properties, credit risk, interest rate fluctuations and the impact of varied economic conditions.

Options involve risk and are not appropriate for all investors. Before opening an option position, please read “Characteristics and Risks of Standardized Options” carefully before investing. This document is available from your financial advisor or the Options Clearing Corporation, 125 S. Franklin Street, Suite 1200, Chicago, Illinois 60606.

Investors should not buy options unless they are prepared to lose the total amount of premiums and commissions paid. Investors should not sell covered call options unless they are prepared to deliver the related securities at the strike price upon exercise of the option.

Insurance products are offered through nonbank insurance agency affiliates of Wells Fargo & Company and are underwritten by unaffiliated insurance companies.