Feel The Burn

We are half-way through 2022 and it has been the most painful 6 months for equity investors in 50 years. It has been tough to watch your stocks and mutual funds decline by 30 to 50% with no end to the carnage in sight. So how do I deal with this situation? First, I resist the urge to sell while stocks are depressed. I feel like I have bought quality stocks at reasonable valuations (for the most part) and I am willing to hold and collect dividends while the market digests all the bad news that is driving it down. Experienced investors have lived through bear markets before and learned not to panic and sell at these lower levels. Secondly, I have maintained a healthy cash position to give me some flexibility for events just like this. For 10 years my cash has earned almost no return, but I thought it prudent to have a reserve for emergencies and opportunities. Thirdly, I don't look down. While checking on my portfolio daily when it is rising is fun, checking on unrealized losses can be depressing. Finally, I try to be optimistic. I know this revaluation of stocks will abate in the not-so-distant future so I focus on what is positive now. After over 10 years of zero or near zero interest rates, a conservative investor can finallly get between 3 and 4% on guaranteed goverment fixed income investments. Instead of buying stocks on the way down, I am repositioning into CD's and Treasury Bonds for additional income. I like the 1 and 2 year maturities currently because with an inverted yield curve, I would not be paid for the risk of investing in longer term issues. My strategy is to buy incremently into fixed investments to take advantage of ever increasing rates. During this interest rate cycle, I expect to have about 10% of my investable assets in fixed income. Eventually, as I age, I will sell profitable stock positions and add to my fixed income portfolio. So what makes me think I will have profitable stock positions in the future? Every interest rate cycle, every bull market, every bear market and every recession has a beginning and an end. This economic storm will also end. The Fed is hard at work to slow the economy, ease the labor shortage, and tame inflation. Market forces will work to ease the supply chain issues that has caused prices to rise, high inventory levels will reduce prices for goods, and the pandemic will become less of a disruptor in the future. All these factors will take time to play out which allows me to continue with my strategy of rebalancing my assets. My forcast for the future of the stock market is that there is more pain in the immediate future due to continued interest rate hikes. When the Fed finally pushes us into a recession and unemployment spikes up, inflation should come down to their target level of 2%. It is then that we will see some relief in the stock market because during a recession, the Fed will start to cut rates. which the market loves. The timing of this is anybody's guess but my estimate is that rate hikes stop in the first half of 2023 and start to fall later that year. Even though 2022 has been a very rough year for everybody, there is a lot to be optimistic about looking forward: Income investors can finally get some yield, some high growth stocks are screaming bargains, inflation will come down, energy production in this country will ramp up, the pandemic will ease, and technology advances will continue to astound us. Markets go up and markets go down, we just have to make the best of it.