Warren Buffett has taught us the benefits of being fearful when others are greedy and to be greedy when others are fearful. This is especially important during times of increased volatility. Deploying the investment philosophy of rebalancing our portfolios when the markets give us opportunities, allows us to practice Warren’s message.
As investors, we start out wanting to buy when markets are good and sell when they are bad. And, as more and more investors become greedy, prices soar. This is when we should be cautious and avoid paying too high a price for an asset that could potentially lead to negative returns. That’s why when others are greedy, we look to increase returns through opportunistic rebalancing. Rebalancing based on market conditions has historically been considered a tactical approach to weathering volatility, and we will look to do so when the market presents the right opportunity.
Consumer prices rose 8.6% year-over-year in May, marking the highest rate since December 1981. May’s rate of inflation exceeded many economists’ forecasts and is stubbornly not as transitory as we initially thought it would be.
Price inflation occurs when demand for a good or service increases faster than its supply and/or when the supply declines faster than its demand. Our current environment has a lot to do with the stimulus, so many of us received during the COVID-19 pandemic and made worse due to a tight labor market. With the Russian invasion of Ukraine and China’s zero COVID policy, supplies of all different types of goods have declined markedly.
Our investment philosophy is centered around the belief that potentially every significant market decline is followed by an even greater market recovery. Our job is to ensure we stay the course, rebalance if able to, and be prepared for recoveries.
Importance of Having a Financial Plan
Having a financial plan in place during market volatility can help give you and our team a better idea of how to meet your long-term goals. Your financial plan should change, adapt and be dynamic just as life changes, so do your circumstances. Maybe you’re in a new tax bracket, recently divorced, decided to start a family, or received an inheritance. These examples affect you personally, and your financial plan should be the roadmap that keeps you on course.
Your portfolio and financial plan depend on you and your goals, but the harsh reality is that the stock market doesn’t know who you are, isn’t aware of your risk tolerance, and doesn’t personally care about your goals. Utilizing your financial plan to guide you through times of volatility and the resources you have around you can help you stay on track and silence the trends and noise that could easily pull you back from staying focused on your goals.
If you don’t have a financial plan in place, I encourage you to reach out to our team so that we can work together to create one. The plan we develop together will consider all areas of your personal finances, so we aren’t missing opportunities to meet your current and future needs.
At MRK, we know that both the stock and bond market is prone to fluctuations and market volatility can cause you concern from time to time. We are staying focused on the long-term goals, the strategies of your unique financial plan, and the potential consequences of making knee-jerk, emotional reactions to market ups and downs.