Preparing for the Turbulence

We have all been on flights where the pilot informs us that turbulence is ahead. They state that for our own safety we should return to our seats and fasten our seatbelts.

The pilot suspects that turbulence is ahead and wants us to be prepared. Well, as your financial advisor, consider this your cautionary warning. Unlike the pilot who gets information from other pilots ahead of them, we only have our best judgment when issuing this warning. The warning is to expect short-term volatility in the financial markets. The unprecedented spending over the last few years by the government, including due to the Covid pandemic, has harmed the US and global economies.

An economist Brian Westbury has likened the situation to that of the economy being the passenger in a car accident. The passenger was badly hurt and was numbed to the pain of their injuries because of the opioids that they have been given. The damage of the Covid shutdowns has been masked due to the government’s flooding of money into the system. In Brian’s analogy, the money was the opioid. The treatment of flooding money into the system which masks the pain is now beginning to wear off. Inflation, which erodes the value of the dollar, is running at a 40-year-high, highlighting the stress the financial system is under. Couple that with worldwide events such as the Russian invasion in Ukraine and China threatening Taiwan leads us to believe that the world is more dangerous.

So, what’s a long-term investor to do with this warning?

Prepare yourself as always by having money saved as cash reserve in an FDIC insured bank account. The amount of this cash reserve should cover at least one years’ worth of spending.

Then, like the pilot’s instructions, brace yourself and stay the course with a well-diversified portfolio. Don’t let the media or your well-intentioned neighbors and friends scare you into making major mistakes such as selling during market downturns. As we have written many times before, the key to a long-term successful investment strategy, as owners of the great companies of the world, is to focus on the long term.

This requires discipline to avoid being caught off guard by the short-term movements in the “stock market.” The companies your portfolio is invested in have been able to survive over decades by adapting their behaviors to profitably survive. Those companies that cannot are taken over by other companies that can. This is why we recommend owning all publicly traded companies. The management of these companies are tasked with providing the owners – that would be us as owners of their stock – with a return on the capital invested. An example of this might be helpful. Recently, a large bank, Silicon Valley Bank, failed after there was a run on the bank. It understandably was removed as one of the companies in the S&P 500 Index.

In its place in the S&P 500 index, was a Massachusetts company that developed an innovative medical device for diabetes called Insulet. Insulet had revenues of $1.3 billion last year[1]. And so it goes. Company management is always working and as owners of those shares, we benefit as long-term investors. Patience is the key.

So, like the pilots warning, put your seat belt on so you can stay invested whatever the short-term market performance happens to be.

As always, I am available to discuss your unique situation if need be.

[1] https://www.fiercebiotech.com/medtech/insulet-tapped-replace-svb-sp-500-index-after-bank-collapse#:~:text=The%20upcoming%20addition%20to%20the,growth%20of%20more%20than%2018%25.