At some point in 2021 the pandemic is likely to recede. With the world population less shattered by Covid-19, expectations of economic recovery are growing.
Looking to this post-pandemic future, financial advisors are taking steps to position their clients for a better tomorrow. Portfolio management requires constant review, but planning a return to the job market and changes in consumer behavior present unique challenges.
With U.S. stock markets near historic highs, hopes of recovery are mixed with fears about expensive stocks on the precipice. On the one hand, stocks were recently more expensive in terms of profits than at any time since just before the fall of the 1929 U.S. market.
“If customers are putting new money on the market, we’re making an average dollar cost for the current market location,” said Jennifer Weber, a certified financial planner in Lake Success, New York. “It gives customers peace of mind, especially if they are worried about the height of the market now.”
For long-term investors, equities remain a likely source of profit even if short-term declines occur. So advisors are trying to find sweet spots within a sparkling market.
Weber says valuations are more attractive to stock stocks after years of stock growth. Thus, her team gradually reduces customer exposure to what she calls “blue growth” offerings, such as well-known names in the technology sector, in favor of valuable stocks. “Risk and volatility on the growth side are reaching their peak,” Weber said.
To navigate volatile fluctuations, advisors often look for bonds to stabilize a portfolio. But using bonds to capitalize on a post-pandemic recovery also carries risks. Jon Henderson, a certified financial planner in Walnut Creek, California, expresses concern about rising levels of global debt fueled by massive public spending.
“This could provide a rude wake-up call if we saw a reversal of the last two decades of falling interest rates,” he said. “A lot of investors have never experienced a growing interest rate environment. People may not be prepared for that.”
To mitigate this risk for his clients, Henderson is considering a reduction in the average term of fixed-income bonds in portfolios. This can be a challenge for some retirees or pre-retirees who prioritize a steady income stream.
“One way to gradually shorten the duration of a staggered portfolio is to pause and not replace maturing bonds with longer new bonds that would normally be bought to continue with the scale,” he said. Short-term bonds are usually less sensitive to interest rate changes than long-term bonds.
The Federal Reserve says it intends to keep the benchmark loan rate near zero until the end of 2023. But some advisers warn investors not to assume that low rates will remain during that period.
“In real practice, the Fed can fall behind the curve, play at a pace and be forced to raise rates faster than expected, especially if there is overheating in the economy,” said Brian Murphy, adviser to Wakefield, RI
He adds that high base metal prices “could portend higher inflation,” along with huge rises in commodity prices and even in bitcoins.
In the rush to benefit from post-pandemic recovery, lush investors could take undue risks. Still, the cardinal rule of keeping a cash fund for rainy days matters more than ever in this situation.
“Don’t forget your six-month emergency fund,” Murphy said. While earning almost nothing in cash can lead investors to pursue higher returns, he warns that the risk may outweigh the reward of a slightly better return.
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