Back to Basics: Post-Pandemic Investment Fundamentals

Over the past year and a half when the world stood still during the pandemic and our personal lives were at risk, many of our financial portfolios flourished. It’s as though while we were stuck inside, our investment portfolios were having a party. Today, as COVID further subsides in the United States, the financial markets remain unpredictable. Our society is evolving toward a “new normal” just as we are moving into a new phase of the typical financial market cycle.

Many are predicting the “Best Summer Ever”, with COVID restrictions loosening and individuals back out enjoying life and one another. Yet even as our worlds open up, now is the time to lock down (so to speak) on your investment strategies. This is the moment to reassess your assets, focus on fundamentals and valuations, and make any necessary moves. It’s also time to revisit your specific financial goals for where you are right now, and where you want to be over time.

How has your life and investment portfolio changed in the last year?

It’s common knowledge that the first step should be taking stock of any life changes over the past 15 months. Yet how many of us take the time to reflect on this? Ask yourself questions such as:

  • Did you suffer negative financial impacts due to the pandemic?
  • Did you buy or sell a home? Or move to a new location?
  • Did your family grow? Or have care needs changed?
  • Did you change careers or are you now planning to retire earlier / later?
  • Did your expenses or other financial expectations significantly shift?

If you monitored your investment portfolio over the past year, you likely saw stocks on an upswing. In 2020, the S&P 500 grew more than 16 percent, a strong return for a year with job losses, supply chain challenges and political tumult. Historically, the market has increased about 9 percent per year on average. Since the end of 2018, yes, we’ve seen volatility, but we’ve also experienced the equivalent of nearly 10 years’ worth of growth from the stock market. This rapid pace of growth has resulted in valuations that are well above average.

We must keep in mind that markets are about the future. Recent performance and high valuations clearly indicate that the financial markets are reflecting considerable optimism in the future and there are good reasons for this. At some unpredictable time, this optimism will wane and the market will turn down before we’re ready. History shows that when the market turns, it can turn fast – so the key is to be ready.

How will those life changes impact your investment strategies?

While we have all enjoyed this upward ride, it’s a good time to revisit investment fundamentals – starting with this (admittedly oversimplified) reminder of the three phases of the typical economic cycle.

  1. Beginning: the cycle typically starts with some type of recession. Unemployment is high. People are scrambling to save, even if they are in a financial position where they don’t need to worry. Businesses scale back. Investors see stock prices are low, which allows them to buy into more and better-quality companies.
  2. Middle: the economy improves. Employment opportunities begin to develop. Overall optimism increases as the economy returns to what feels like “normal.”
  3. End: the economy is strong and economical worries from the previous cycle declines. Unemployment is down. Interest rates start to increase. The housing market booms. There is a feeling that this cycle will continue forever. Times are good.

Market cycles can be long or short. Even despite the intensity of the pandemic, the most recent cycle of growth has lasted 11 years. There’s no denying we are currently in the last phase of this cycle. While it may continue on for months, or perhaps even years, it is inevitable that a downturn will come and the cycle will begin again.

This is why our “Best Summer Ever” is the ideal time for investors to closely review their portfolios and re-assess the risk they’re taking on. The key question is, is it appropriate for your current stage of life?

In reassessing the risk level of your portfolio, there are important nuances to consider. For example, while it may seem counterintuitive to what you were likely taught, the risk of bonds can be the same as stocks depending on the qualities of the specific bonds you own. We saw this back in 2008. When companies with weak fundamentals become over-leveraged with debt in an overheated market, suddenly bonds can become as volatile as stocks. So, check the quality of your bond holdings and decide if it’s time to make some different choices.

How can you prepare for market adjustments and meet your specific financial goals?

Start by talking with your financial advisor and reviewing where your biggest wins have been over the past year. Are these wins stable? Are they in hot, new areas? While new areas can be exciting, they may also become rapidly overvalued. As we have seen in market shifts even over the past year, volatile or new areas can become a risk as price changes happen quickly.

A smart investment management strategy balances careful planning, evaluation, and a long-term vision. We all know the market is cyclical. But it takes forethought and discipline to get ahead of the inevitable market shifts as the cycle progresses. An equally disciplined advisory partner will provide value-adding insight to outperform the markets over the long-run, ensuring your investments are well-positioned for whatever lies ahead.

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