Consider asking your advisors these questions today as you evaluate your investment strategy
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.
- How will changes in the economy and markets impact my investments going forward?
- Am I allocated in alignment with my investment plan?
- Am I on track to reach the goals we’ve established?
- Is my time horizon still reasonable?
- 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.
1. Source: Wells Fargo Investment Institute and Hedge Fund Research Inc., September 30, 2022.
Insurance products are offered through nonbank insurance agency affiliates of Wells Fargo & Company and are underwritten by unaffiliated insurance companies.