How to Invest During Chaotic Times

February 28, 2022

By Samuel Richter
Securities Analyst

The S&P 500 entered correction territory last Tuesday, a decline of more than 10 percent from its record high on Jan. 3. As discussed in previous commentaries, the markets are pricing in the anticipated interest rate hikes from the Federal Reserve.

A second contributor is the expanding war between Russia and Ukraine — which is not only a humanitarian tragedy, but also a conflict that will continue to impact the markets.

Now more than ever, the volatile start to the year shows the importance of diversification.

Why diversification is so important

Portfolios with broad diversification have outperformed in this volatile time. The chart below from J.P. Morgan’s Guide to the Markets shows asset class returns throughout the years. Each asset class has its own color. The constant change in colors from year to year shows how market leadership changes from year to year. The broadly diversified portfolio (white box) provides a favorable long-term return while smoothing out the volatile swings.

Asset Class Returns

Valuing value over growth

The S&P 500 is a capitalization-weighted index, meaning the largest companies carry the most weight. In fact, the top 10 components account for just over 28% of the entire index value. Those heavily weighted stocks are mostly growth-themed technology names. They have declined about 4% more than the entire S&P 500, on average.

If you take out the two value names in the top 10, then the remaining eight growth-oriented stocks make up just over 25% of the index. Those eight stocks on average have declined about 6% more than the total S&P 500 this year. This shows the impact growth-oriented stocks have on performance of the S&P 500.

This is why we build our client portfolios to protect value in this volatile, higher-inflation, rising-interest-rate environment. On the stock side, we are fully diversified with a slight tilt toward value-oriented and foreign themes. Those areas of the market tend to ‘hold their own’ better in a rising interest rate environment.

What about bonds?

On the bond side, we have reduced duration in order to better preserve principal in a less investor friendly interest rate environment. Our positioning has helped performance in the challenging beginning of 2022.

Sometimes there are few places to hide, but our positioning is lowering the impact of the ‘bad news’ our clients are seeing in the headlines. We work to provide the best opportunity to meet your long-term goals with the minimal amount of short-term risk. Diversification is a core tenet of this philosophy.

Contact us today to discuss how your portfolio is set up to achieve your long-term goals. As always, your success – and safety – matter to us.

Image: What appears to be an armed soldier, wearing the Ukrainian colors, poses or a photograph. Credit: iStock/Getty Images

About the Author

Samuel Richter

Samuel Richter is a Senior Securities Analyst within Security National's Wealth Management division. He began his career at SNB in 2020, after graduating with a degree in finance from Iowa State University.

Spring Cleaning: Time to Cultivate Your Financial Plan April 15, 2024

As the old adage goes, April showers bring May flowers. Depending on where you are from or walk of life, this proverb can take on many meanings. The way I interpret the classic saying is that April represents a time for preparation. A time to do some spring cleaning and tackle projects neglected during the winter months. For farmers, it means a return to long days in the fields. For accountants, it signifies the conclusion of an arduous three months of tax preparations. At Security National Wealth Management we feel now is a great opportunity to assess your financial plan and ensure you are on the right path to achieving retirement goals.

Look What's on the Verge of a Major 40,000 Milestone April 1, 2024

In early December 2020, my colleague, Michael List, published an article marking the Dow Jones Industrial Average hitting the 30,000 milestone. In that article, Michael describes four different methods that each provide us with an educated guess as to when the Dow would cross the 40,000 milestone, with guesses ranging from two to six years. Michael said that the 40,000 milestone probably would be here faster than we expect but that it ultimately would leave us with more questions, e.g., when would the Dow reach 50,000? And now, about 40 months later, or 3.33 years, the Dow is approaching 40,000, causing us to guess when it ‘turns’ 50,000. To continue our analysis, let’s use the same methods utilized by Michael to predict the arrival of the Dow at 50,000.

Unveiling the Fed: Journey from 'The Great Oz' to Transparency March 25, 2024

One of the evolutions in my investment career was the increasing transparency of the Federal Reserve over time. Decades ago, the Fed was seen as ‘The Great Oz’, its deliberations hidden behind the curtains and then revealed to the public through its actions. Deciphering the Fed’s inner workings was a cottage industry on Wall Street. Clarity in public pronouncements was not a priority for the Fed. The environment is much different today.