Second Quarter 2022 Thoughts

When you watch the S&P 500 Index go down over 20% in six months, coupled with everyday items becoming rapidly more expensive due to inflation, it’s hard. I’m not shying away from this. I’ve found it hard to keep a positive focus as the market gets pummeled day after day. While our economy looked healthy, near-zero interest rates have been making it seem rosier than it was - it wasn’t a normal situation. But a reminder that it's temporary and markets act in cycles does offer some comfort. We will come out the other side of this and be in a more-rounded economy because of it.

An encouraging part is the solution to inflation (raising interest rates to dampen consumer demand) is being implemented. It’s not complete yet, but hopefully by the end of 2022, inflation should be on the way down to normal levels. The knock-on effects of this are hard as well - long-term financial plans may need tweaking, spending expectations may need adjusting, and riding the roller-coaster of investing can be emotional. Over the last six months, I’ve had conversations with clients about what it means for their situation, but often the answer is to do nothing. Acting on emotion when it comes to investing is likely the wrong choice, but for some, taking a break from the market is needed.

There are three "silver linings" over the last six months, and some of these have been implemented in your portfolio:

 - Declining markets lead to investment losses - where the price of the investment is less than you bought it for. When these positions are sold in a non-retirement account, the losses can be used to offset any gains from other investment sales, or reduce your income. Both of these strategies reduce the amount of tax you pay. When coupled with a viable tax-loss harvesting investment strategy, you can get access to these losses, reduce your income, and still be invested in the same portfolio you have always been in. Rather than blindly sit on our hands, I’m making sure you get some benefit out of this market downturn.

 - Interest rate adjustments need to be carefully analyzed, especially with inflation on the rise. In the long-term, higher interest rates are an important part of a long-term portfolio. The interest payments when reinvested continue to grow your portfolio, or can be used as income to support your lifestyle in retirement. However, as overall interest rates are being increased, the value of current bonds goes down. This is what you have seen in the bond portion of your portfolio. Newly-issued bonds, with recent higher interest rates attached to them, are more attractive so the demand for current bonds with lower interest rates is lower. To counteract this, some of your longer-term bond positions have been changed to those that are shorter, and invested in inflation-protected bonds. This dampens the affect of future interest rate changes. Once we get into a more stable interest rate environment, we’ll go back to a more traditional approach to bond holdings.

 - In your portfolio, you’ll notice that there are two fund families - Vanguard and Dimensional Fund Advisors (DFA). With Vanguard, we use their Exchange-Traded Funds for investments. These are easier to trade, cheaper to own and are more tax-efficient. Until recently, DFA didn’t offer ETFs - they just used mutual funds. In my research this year, I’ve found that the DFA mutual funds you have in your portfolio now have ETF counterparts. This quarter, I have switched out the mutual fund holding for its ETF equivalent. If the change was made in a non-retirement account, there might be a slight tax consequence this year, but it is a better move for the long-term. If there is a tax consequence, I will discuss it with you and make sure you’re aware of the situation.

I know this is a challenging time, both in investing and elsewhere. If you’d like to chat about your situation, investments, or anything else, please know I’d be happy to talk.