Viewpoint - Market Update & Portfolio Construction

May 16, 2022

This year has not been a good year for investing in some of the largest markets.  Many have seen significant pullbacks throughout the year.  The month of April saw four straight weeks in the red for US markets, and this was followed up by further pullbacks to begin May.  In light of this, we want to share what we’re seeing and how we view these current developments.

First, we recognize the stress and anxiety that pullbacks like this can create.  We also recognize the frustrations (and even hardships) they can create in your daily life as you view retirement and your financial goals through a different lens.  These thoughts and emotions are not lost on us and we encourage discussion of these.


What’s the data showing?

In times like this, it’s important to remember that markets move up and down.  It’s also important to recognize historical significance to pullbacks like these.

  •  After a pullback of 15-20%, the average gain over the following 12 months has been 24%, with gains in 11 of 12 instances dating back to 1980. (Source: LPL Research 5/9/2022).  
  • Volatility is normal and expected.  For the S&P 500, the average annual pullback is 14.2% dating back to 1980.  There have been six mid-year pullbacks greater than 20%, of which half finished the year higher (1987, 2009, and 2020). This is shown in the following chart.  (Source: LPL research 10/5/2021).  

  • Following the initial Fed rate hike, stocks have historically performed well.  Dating back to 1987 there have been 7 rate hikes.  One year after the rate hikes, the S&P 500 has been higher 6 of the 7 times for an average of 10.2%.  Keep in mind, the current cycle of Fed rate hikes started in March 2022. This is shown in the following chart.  (Source: LPL Research 4/20/2021).  

  • Timing the market can be costly.  This chart shows the impact of investing and missing the best days of the market.  Keep in mind, history has shown the biggest gaining days occur in close proximity to the biggest declining days.  (Source: LPL Research 3/23/2020)


    What have we been doing to prepare for this?

    In meetings over the past year, we’ve shared that a future pullback was expected (although we could not predict the size or the timing).  This belief that “a pullback was expected” was based on historical trends that pullbacks are natural and important in investing.  We also believed that interest rates were bound to increase given the historically low interest rates and the statements provided by the Federal Reserve indicating that interest rate hikes were expected.  This was a well telegraphed campaign to raise rates.  With this current and historical data in mind, we made changes throughout 2021 in our discretionary advisory portfolios that reduced interest rate risk in both equities and bonds before the market peaked this past November and December.

    It’s important to remember that we will not try to time the market, as we believe that is a fool’s game.  The decisions we make are driven by three main factors. 

    • Research: Historical analysis has shown there are key drivers of returns in portfolios and we construct portfolios to tilt towards those areas.
    • Risk: As markets move, so does the risk of the underlying investments.  Our job is to maintain a portfolio that has a risk that is in line with your goals.
    • Thresholds: We set tolerance thresholds for each holding within that portfolio.  As a holding moves outside of our target threshold, it creates an opportunity to buy/sell to bring it back within the target threshold.

     In light of the previous three bullets (Research, Risk & Thresholds), the adjustments made in 2021 helped align our portfolios with your larger goals.


    Where do we go from here? 

    We begin by focusing on the financial plan.  We believe this is one of the most important components of long-term financial success as it puts a roadmap in place for the future.  It also provides clarity and actionable items that should be taken in both up and down markets.

    We follow that by focusing on portfolio construction.  In each portfolio we’ve specifically identified funds that address your needs over the next 1-2 years, 3-6 years, and beyond.  Knowing the purpose of each holding allows us to craft your portfolio in line with your needs.  It also provides a level of confidence as your more immediate needs are in less risky holdings.  We can clearly illustrate this if you’d like to explore this construction in more detail.

    As opportunity allows, we expect to make changes in portfolios in response to evolving risk and thresholds.  We are beginning to see opportunities in markets that we haven’t seen over the past year, and we will look to take advantage of those.  We do not know when the market will bounce back, but history has shown us it will at some point.  Buying the dips like this improve chances of long-term success in investing.  As mentioned above, these adjustments will be driven by Research, Risk, and Thresholds to keep your portfolio aligned with your objective.


    What’s the bigger picture?

    Not to make light of this volatility, but a couple years ago a good friend shared wisdom that I’ll never forget.  In mid-March 2020, in the midst of the COVID pullback he had watched his retirement account fall significantly only months before he planned to retire.  When I asked how he was doing, he shared the following…

    “It’s all about perspective. When I look at how my portfolio is doing over the past 30 days, it’s not pretty.  When I look at how it’s done over the past couple years, I’m flat.  When I look at how it’s done over the past 10 years, I have more money than I ever expected to have.  And when I look at it through the lens of eternity, I realize the size of my portfolio doesn’t even matter.”

    It’s important to maintain perspective at all times in life, but especially in the valleys and at the peaks.  Do not hesitate to contact us if you have any questions.



    Investing involves risk including loss of principal.  No strategy assures success or protects against loss.  Content and opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and may not be invested into directly.  The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.