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Mind on Money: Patience and discipline required

By: Marc Ruiz Last Updated: June 6, 2022

Here we go again. The warning sirens are growing louder and louder, the winds of change seem to be blowing, and it looks like a storm is moving in.

In order to defend its credibility and attempt to fulfill the price stability (inflation control) component of its mandate, the Federal Reserve is tightening financial conditions and raising interest rates after a long period of historically low rates and highly accommodating monetary policy. The results are occurring as intended and expected. The stock market is in the tank, the bond market is in the tank and I believe the housing market peaked this week as well.

There’s always hope a recession can be avoided, but caution is also required at this point. At the very least, stagflation looks like it is in the cards. For those of us, like me, who are too young to remember the last time our country experienced this phenomenon, the economic conditions creating a stagflation environment result in slowing growth, rising unemployment and rising consumer prices, all at the same time. A triple whammy.

Managing through these conditions on a macroeconomic level will require bold monetary policy responses and government pragmatism. I think the heavy lifting will fall to the Federal Reserve this time, and hopefully voters will give us a much less ideological federal government in the fall. The current government is simply not up to the task, in my opinion. What is becoming clearer to me, is that these challenges may not be quick and easy to fix.

How can individual investors prepare for a period of stagflation and central bank austerity? First, by being patient, and second, by being disciplined.

When it comes to stocks, the ship has already left the pier. For investors that have money needed in the next five years exposed to stocks, a hard lesson is being learned. The stock market has proven to be a powerful long term wealth creation mechanism, but it is not a toy, and as we are learning, over the short-term markets can be extremely treacherous. If short term money is invested in stocks, then the stock market wasn’t being used appropriately and there will need to be a plan to protect what is left; a generational opportunity for education is about to unfold.

For longer term investors, I believe it's important to realize that unlike a “buy the dip” type market, in this particular flavor of bear market, the companies and strategies which led the declines may not necessarily be the ones that bring us back on the upside. While I can’t suggest paring back market exposure at these levels, I do think investing strategies can be updated to reflect the new market environment.

Companies without earnings, with narrow business models and weak balance sheets may have been the growth darlings of the last market cycle, but using the last bubble in tech stocks (2000-2002) as a frame of reference, may not survive and recover in the next. If patience and discipline must rule the day, then I like companies with real, durable earnings, fortress balance sheets and a history of distributing solid dividends to investors. These types of stocks may not be glamorous, but right now I won’t be afraid to take a loss in the silly stuff to reinvest in quality companies with true staying power.

For those investors who are using the stock market appropriately with longer term money, or who took profits and actively reallocated at higher market levels, patience and fortitude will be required for your next moves as well. No one likes to be down in their investments, but bear markets are natural parts of the investing cycle and occasionally even the deftest investors experience declines. The key will be maintaining wits, assembling a patient reallocation plan and courageously executing at times when it may not feel all that right to be doing so. If buying low and selling high was easy, it wouldn’t need to be said, but it's not, and I do believe some investors may find some generational opportunities before this cycle is over as well.

Finally, for investors favoring mutual funds over individual stocks, index fund investing has clearly been the trend for the past 20 years. While I like a lot of things about index fund investing, now may be a time to integrate some more active management to a portfolio. Having a professional stock picker (fund manager) identifying opportunities and more importantly screening out weaker companies may provide some benefit in the new market cycle we are all now experiencing.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. This material may contain forward looking statements; there are no guarantees that these outcomes will come to pass. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.