The Other Stuff

Written by Lee Stoerzinger, CFP®

Let’s talk markets. I’m assuming you think I’m referring to the U.S. stock market, right? Well not so fast. I understand when we think about our own retirement, we tend to look at the news about the stock market to see how we think we are doing. In this article. I want to take a broader approach and share some thoughts on important things going on economically beyond the stock markets, and how they directly affect you.

When we build portfolios, there are many different parts depending on the specifics for each client. Traditionally, the “engine” part might be the percentage we have allocated to stocks – 40%, 60%, 80%, etc. based on risk tolerance. The rest might normally be considered the “stuff” that reduces the risk, such as traditional bonds. So, you may have a portfolio that is 60% stocks and 40% bonds, for example. In our discussions, we tend not to pay as much attention to “the other stuff” such as the traditional bond side because, for many years, it just did what it was supposed to and the economic environment supported this approach. We believe this is about to change.

Since interest rates peaked in the late 1970s and early 1980s, we have essentially been in a declining or flat interest rate environment, beyond maybe a few outlier years. This has been a great scenario for long-term bonds because when rates go down, bond prices go up. Due to several economic forces, including Federal Reserve action, inflationary pressures, and the sheer amount of money in our economy, we may now be in the first period in several generations where we need to manage portfolios based on rising rates. So, what does that mean to you? It means same job different tools.

While we spend time looking at global markets and determining where we think they are headed, we have significantly changed how we are building the “other side” of portfolios. These parts still need to “pull their weight” so to speak, and we want to be sure they are allocated correctly. For example, shortening maturities on the bonds we hold, increasing commodity and managed futures exposure, rising dividend holdings, etc. These provide opportunities during rising rates as well as inflationary hedges and set out to do what they can as part of the larger picture.

We normally wouldn’t get so far into the weeds in a newsletter article, especially as it relates to how we manage portfolios, but we felt it was important. You will be hearing a lot of news over the next few years about inflation, rising interest rates, what the Fed is going to do, and how our economy is changing. Rest assured that we have already taken this into account and spent time building portfolios which will reflect this new reality. We all still need to get where we are going. It’s just that the trail might look slightly different going forward.

This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.