Figuring out where to put new money to work in today’s market can feel overwhelming. Since the 2020 pandemic, the market has been on a tremendous run which has seen the S&P 500 index less than 4% from all-time highs at time of writing. However, many feel caught in the turmoil of uncertainty as the market nervously waits on everything from presidential polls and geopolitical news to the highly anticipated Federal Reserve rate cut and technology sector growth. What gives?
It’s important to remember that big events like these eventually pass. The bears, the bulls, and the overall market sentiment will shift focus to the next issue.
For example, when the pandemic started in 2020, stock markets crashed as workers were sent home and businesses shuttered. The US employment rate spiked to over 10% as the worldwide economy stalled. Now we are in an economy with completely different risks like high inflation and borrowing rates.
Over the last few years of choppy markets, many investors pulled money out of domestic stocks, preferring the relative safety of bonds during a period when bond yields hit historic lows and returns evaporated. This chase for safety pushed many investors into taking less risk than they might have preferred, complicating their efforts to reach their goals. As the economy recovered and stocks rallied steeply, those who moved to safety have found it difficult to find value in a fully priced market.
We have met with others that have a sudden infusion of cash from a business sale or other event that they want to put to work, but find it difficult to invest more into stocks that have already seen meteoric rises in the last few years.
For clients with cash they would like to put to work, whatever the reason, we have found success using the following framework:
- Communicate and understand your current asset allocation and investment style
Start by discussing your existing asset allocation with a professional advisor. This step ensures that your recommended allocation reflects your financial behavior, risk tolerance, time horizon, and long-term goals. It’s important to take a step back and assess whether your current portfolio still meets your needs or if it’s time to reassess and make adjustments.
- Establish a liquidity strategy and long-term allocation that you can stick to
Portfolio liquidity is often needed to cover short-term needs, maintain an emergency fund, and limit volatility in your overall portfolio. Determine a liquidity level that makes sense for your situation. From there, develop a long-term asset allocation that balances risk and return.
The key to an effective long-term allocation is creating a strategy that you can stick to, even in turbulent periods. Research shows that staying invested is critical to enjoying long-term returns, as significant market moves often happen in a limited number of days.
- Develop an entry strategy for each asset class
Once your asset allocation is established, determine a clear timeline for deploying funds. Cash and money markets can be invested right away to begin capturing yield. Bonds are often deployed quickly since models are aligned with the current interest rate environment.
For stocks, investing cash over a period of time can potentially take advantage of dips in the market and minimize the entry point risk of investing everything all at once. Phasing into stocks over several months or over a year can help mitigate entry-point risk.
For more sophisticated investors, options can be used to hedge entry risk and generate income. For instance, selling covered calls can provide additional income while waiting for the right moment to enter, while protective puts can safeguard against downside risks as you phase into stock positions.
- Evaluate long-term and passive investments regularly
Once your portfolio is in place, regular evaluation is key:
- Assess how your active managers are performing relative to their benchmarks
- Ensure that your passive allocation decisions are optimized
- Consider adjusting asset allocation at pivotal life points, like retirement or a career change
- Confirm that your passive investments align with your active strategies, avoiding over-concentration in any single area
Once you’ve completed these steps, you should have a firm understanding of how your investments should be invested for the long haul.
The best way to overcome the fear of investing in uncertain times is to think long-term, create a solid plan, and stick to it. Markets are often forward-looking and frequently recover before the broader economy shows improvement. Sitting down at the trade desk with a well-structured investment plan will help keep you focused on your long-term goals and prevent emotional reactions to short-term market fluctuations.
Over the course of five or ten years, a diversified portfolio has the potential to significantly outpace inflation, providing meaningful growth. Patience and discipline are often the key differentiators between a successful investment strategy and one derailed by short-term emotions. With the right framework in place, you can ensure that your capital remains productive and resilient, no matter the market conditions.