At some point in 2021, the pandemic is likely to disappear. With the global population less affected by Covid-19, expectations of an economic recovery are growing.
Looking to this post-pandemic future, financial advisors are taking steps to position their clients for a brighter future. Portfolio management requires constant evaluation, but planning for a labor market comeback and shifts in consumer behavior pose unique challenges.
With US stock markets nearing record highs, hopes of recovery are mixed with fears of overpriced stocks on the precipice. By one measure, stocks have recently been more expensive in relation to earnings than ever since just before the US stock market crash of 1929.
“When customers put new money in the market, we are putting more resources into the dollar cost because of the current market,” said Jennifer Weber, a certified financial planner in Lake Success, NY. “It gives customers peace of mind, especially if they are concerned about how high the market is now.”
For long-term investors, equities remain a likely source of profit even when declines occur in the short term. That’s why advisors try to find sweet spots in a frothy market.
Weber says valuations are more attractive to value stocks after years of rising growth stocks. Her team is therefore gradually reducing client exposure to what she calls ‘blue-chip growth’ offerings, such as big names in the technology sector, in favor of value stocks. “Risks and volatility on the growth side are at their peak,” said Weber.
To navigate volatile swings, advisers often look to bonds to stabilize a portfolio. But using bonds to profit from a pandemic recovery also carries risks. Jon Henderson, a certified financial planner in Walnut Creek, California, expresses concerns about skyrocketing global debt levels fueled by massive government spending.
“This could make for a rude awakening as we see a reversal of the last two decades of declining interest rates,” he said. “Many investors have never experienced a climate of rising interest rates. People may not be prepared for that. “
To mitigate this risk to its clients, Henderson is considering shortening the average maturity of fixed-rate bonds in portfolios. This can be challenging for some retirees or pre-retirees who prioritize a steady income stream.
“One way to gradually shorten the duration in a ladder portfolio is to pause and not replace maturing bonds with new longer-term bonds that would normally be bought to continue the ladder,” he said. Short-term bonds are generally less sensitive to interest rate movements than long-term bonds.
The Federal Reserve says it plans to keep its benchmark rate close to zero until the end of 2023. But some advisers are warning investors not to assume that low interest rates will remain in effect during that period.
“In practice, the Fed could fall behind, catch up and be forced to hike interest rates faster than expected, especially if the economy overheats,” said Brian Murphy, an adviser at Wakefield, RI.
He adds that rising base metal prices “may predict higher inflation,” along with massive spikes in commodity prices and even bitcoin.
In the rush to capitalize on the post-pandemic recovery, lavish investors may be taking unnecessary risks. Still, the most important rule of holding a cash fund on rainy days matters more than ever in this situation.
“Don’t forget your six-month emergency fund,” Murphy said. While earning next to nothing in cash can lead investors to pursue higher returns, he cautions that the risk could be greater than the reward of a slightly better return.
Lake: The # 1 job in America that pays $ 100,000 a year – and it’s not in Silicon Valley
Plus: Mark Cuban Says Recent Cryptocurrency Trading Is ‘Exactly Like the Internet Bubble’