Some asset allocation trends have emerged in light of COVID-19’s effect and projected impact on the economy—but comprehensive, individualized planning remains essential
Investors with a longer time-horizon know how beneficial it is to stay the course during a downturn or even a shock event. Whether it’s a natural disaster, war, or, in this case, a global pandemic, the economy and market have always recovered. And wealth managers generally counsel the patience required not to unnecessarily lose positions because of short-term volatility.
However, those with a shorter time-horizon might not have the appetite or ability to stay the course if their investments aren’t performing. For example, in the current situation, some investors have given riskier vehicles a second look rather than focus on U.S Treasury bonds that’ll have near-zero interest rates for the near future.
The path each investor and wealth manager takes is dependent on how much time an individual has until retirement and when they’re otherwise going to need the cash.
Here’s a look at some considerations and asset allocation analyses as the world lives through a pandemic.
The divergence between the market and the economy
Before looking at the current investment landscape, it’s essential to consider the difference between the market and the economy. While the stock market is generally doing well, the economy is struggling.
Manufacturing and tech are driving much of the current stock market performance. However, goods and services remain critical factors in the overall economy.
The economy is struggling as social distancing measures and lockdowns make it more challenging for a range of retailers, hotels, restaurants, and consumer goods businesses to attract customers. And many people have fewer discretionary funds as many companies close their doors, leaving a high unemployment rate that feeds a negative cycle.
However, we’ve seen tech take the place of many face-to-face interactions, including more people shopping online, which is driving specific sectors and stock market gains.
Regardless of the legitimate performance of certain aspects of the economy, much of the stock market’s relative health relies on the fact that it is highly speculative. With a universal vaccine roll-out just around the corner, investors evaluate how the economy will look in six months rather than how it appears right now.
Some investment trends
There’s a tremendous amount of investment opportunity, depending on the investor’s timeline and openness to risk. For instance, there are $15 trillion in global bonds with negative yields available for those willing to look years down the road. A short-term investor wouldn’t want anything to do with this negative yield. But some analysts view inflation as a reasonable possibility, arguing that bonds a more attractive investment for long-term investors.
For example, U.S. Treasury inflation-protected securities, or TIPS, protect investors from a decline in their purchasing power due to inflation. These bonds rise in principal value as inflation increases, paying out according to the adjusted principal. Thus, some investors have moved to such vehicles, aiming for protection against further economic downturns.
Other analysts have touted emerging markets, arguing they may recover far faster than developed markets because they experience downturns more frequently. While full-blown recessions occur periodically in developed markets, emerging markets can experience this process multiple times per decade and often bounce back quickly. Thus, some analysts are touting relevant vehicles for investors with shorter time-horizons.
Other trends may materialize in the coming months, including investing in stocks that rely on the brick-and-mortar economy—which might see a renaissance as the pandemic and lockdowns ease.
Again, the tech sector fueled a considerable amount of the S&P’s growth in 2020, with major corporations like Apple, Microsoft, and Alphabet responsible for much of the stock market’s performance in a stay-at-home economy. But some analysts argue that as people get back to participating in face-to-face life, businesses that rely on these interactions—and their correlating stocks— could recover quickly.
The above trends are merely examples of some investment analysts’ arguments—and strategies that some investors are adopting. And no one knows how a post-pandemic recovery will play out and how fast it may take hold.
In reality, wisely allocating assets is based on various timelines and goals, and a dynamic market only underscores the need for a highly-customized portfolio. And regardless of trends, changing market conditions, and other factors, there are a couple of universal guidelines that apply to essentially all portfolios: a comprehensive strategy is far better than tactical investing, and increased risk tolerance correlates with longer time horizons.
Devising the right strategy for you
The plan an investor selects must hinge on their goals and individual circumstance. There’s a lot of volatility out there, making it essential to adopt well-considered strategies that attempt to meet objectives while safeguarding wealth. Plans should be as comprehensive as possible—also considering both tax implications and working with an individual’s other key advisors, including CPAs and estate attorneys.
Lindberg & Ripple features a team of experienced wealth advisors who can assist with your wealth management and investment strategies. We’ll help you develop a customized plan designed to grow and preserve wealth for future generations.
Contact us to speak with a wealth advisor today.