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Position A Portfolio Finding Certainty In The Midst Of Uncertainty
Just because the market is unsure does not mean that an investor needs to be unsure. • Bryan Cannon
Uncertainty is an inescapable part of life. Google the word “uncertainty” and you will not discover ways to do away with it, you will only find ways to deal with it.
The changes brought to our world by the COVID-19 pandemic revealed just how all-encompassing uncertainty can be. From infection rates to interest rates, many experts had to admit that the “new normal” makes it difficult to be certain about anything. Nowhere is this more obvious, or more unsettling, than in the area of financial investing.
Addressing The Certainty Of Uncertainty
The certainty of uncertainty always has and always will be a component of investing. Investing well does not mean you have done away with uncertainty; it simply means you have found a way to manage it.
Financial advisors will never be able to offer their clients guarantees. However, by understanding the various market factors that are at work, we can provide our clients with investment strategies that acknowledge unavoidable uncertainties and incorporate the necessary flexibility, diversity and responsiveness into those strategies. Just because the market is unsure does not mean that an investor needs to be unsure.
Considering Inflation Concerns
Inflation is one of the key factors to consider when positioning investment portfolios for success in 2022. Although the current rise in inflation was initially deemed “transitory,” a recent article in Forbes reported some experts predicting inflation will last well into 2022 and possibly beyond.
While history provides lessons on the impact inflation can have on investing, the uncertainty associated with inflation makes predicting fluctuations impossible even with years of history from which to glean. Not only is the course of inflation uncertain, with many variables affecting it, but the way in which investors react to inflation and their impact on the market
is also uncertain. For example, the market can change in anticipation of government action, such as the raising of interest rates, that may never come.
If inflation lingers, your clients must be aware of its impact and must be encouraged to adjust accordingly. Typically, growth stocks are not the best option during times of inflation. Value stocks and government bonds are better options for times of inflation.
Considering COVID-19 Impacts
The COVID-19 pandemic has added to, and will most likely continue to add to, the uncertainty of investing. The interruption in supply chains provided considerable challenges for many companies. The changes COVID-19 brought to the workforce mean companies and consumers alike have fewer resources.
How long these factors will continue to challenge companies remains unclear. Should they become part of the new normal, wise investing will involve identifying the sectors and companies that have discovered ways to overcome the challenges and operate profitably.
Considering Political Risk
Regardless of your clients’ political leanings, their investments could be impacted by political risk. When governments make or influence decisions affecting taxes, spending, fiscal policy or international relations, they can affect in unpredictable ways the success of domestic and international organizations and the ways in which their stocks perform.
Determining what stocks are safe from political risk is a challenging endeavor. All companies — especially multinational companies — are subject to the effects of political risk. The best investments are investments in companies that take steps to understand and mitigate their political risk.
Moving Beyond Diversification
Guiding your clients toward a diversified investment portfolio is a good strategy for investing during uncertain times. Diversification manages uncertainty by relying on a varied group of investment vehicles, each of which can be reasonably expected to respond differently to the factors that affect markets. As a result, when one sector of the economy loses ground from any of the factors explored above, another sector may gain ground.
Diversification typically will keep a portfolio on an increase that tracks with the market. However, for those looking to provide sound investment guidance during uncertain times, diversification is only the beginning of a good strategy.
Those who are familiar with the stock market know that in 2008, the market experienced a historic decline, ultimately dropping more than 55%. Even the most diversified portfolios were not safe from considerable losses during that season. I realized at that time that I needed a better solution than diversification to guide my clients through times of uncertainty.
My research led me to a solution that manages uncertainty by combining diversification with a trading discipline known as technical analysis. Obviously, healthy investing begins with identifying healthy companies with a proven track record and a promising future. Once that is done, technical analysis analyzes statistical trends to guide the timing for buying and selling stock in those companies.
My personal experience during the 2020 market drop caused by the COVID-19 pandemic proved the wisdom in this strategy. When the market fell from peak to trough over 36%, our all-equity aggressive portfolio served our clients well, outperforming a conservative 60/40 blended index on the downside, as well as beating the S&P 500 on the upside for the year.
The best guidance you can give your clients in 2022 and beyond is that uncertainty will continue, and you will analyze the market on an ongoing basis so that you can help your clients continue to invest with clarity and confidence.
Inflation Is One Major Concern Investors Have In 2022
United States Annual Inflation Rates (2012 to 2022)
Source: US Inflation Calculator
Bryan Cannon, CFP, is a stock market technical analyst with more than 25 years of financial planning and investment experience. He may be contacted at bryan. cannon@innfeedback.com.
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TRUEor FALSE
Home or renters insurance Misinformation About 58% TRUE (correct) policies will cover your personal belongings even if they’re stolen from outside your home. Coverage Is Common, Survey Finds Source: ValuePenguin
43% FALSE
Many policyholders have misconceptions about what their insurance covers and what it does not, according to a ValuePenguin survey.
Fewer than half (43%) of Americans don’t know that homeowners or renters insurance covers personal belongings even if they’re stolen from outside the home. Seven out of 10 wrongly believe auto insurance would cover belongings stolen from a car. Three out of 10 correctly answered that homeowners or renters insurance would cover those stolen items.
Most people (69%) do realize that comprehensive auto insurance may protect them if their vehicle is stolen or damaged during a break-in. But nearly 25% of those with collision auto insurance wrongly believe they’re covered in these situations.
The survey showed that many Americans are more vulnerable to becoming victims. In particular, 78% don’t have motion sensors outside their home, 38% don’t lock their front door while at home, 16% sometimes leave their car unlocked, and 10% occasionally leave their wallet in their vehicle.
ANOTHER FLORIDA HOME INSURER IN TROUBLE
Lighthouse Property Insurance Corp. lost its financial stability rating, which means it will likely be placed under state receivership and dissolved. It’s another ominous sign for Florida’s failing property insurance market.
The loss of Lighthouse’s rating follows the failure of four Florida-based property insurers since April 2021.
Together, about 50 Florida-based insurers reported more than $1 billion in operating losses in 2021. Insurers say the industry is being torn apart financially by severe weather claims, roof replacement claims, contractor fraud and excessive litigation.
More than 100,000 lawsuits were filed against Florida insurers last year. Florida accounts for 76% of all property insurance litigation in the country, state insurance regulators said last year. part of a class action filed in State Farm’s home state of Illinois in 2020, alleging the carrier treated them unfairly and assigned them to less lucrative areas and did not have Black agents take over existing books of business.
State Farm released a statement saying it is an inclusive company and will defend itself in court.
STATE FARM FACES ANTI-BLACK BIAS CLAIMS
State Farm is facing a wave of racial discrimination claims from employees and clients who say the nation’s largest home and auto carrier denied claims from Black homeowners on false fraud allegations and treated Black agents and employees unfairly.
A New York Times article focused on a Black landlord in a Black neighborhood who was denied a claim for damages due to a water pipe break. State Farm denied the landlord’s claim because of what it said was a history of fraud in the area, according to the article’s allega-
tion. A former State Farm employee who was already suing the company came to the landlord’s defense, saying that the carrier had a system of limiting losses by categorizing many claims as fraud in Black areas. The employee was later fired.
A group of seven Black former agents are
QUOTABLE
Rush hour is our biggest exposure time as insurers. That’s when people have accidents.
— Don Hendriks, actuary and data scientist at CARFAX Banking & Insurance Group
IOWA BILL WOULD LIMIT POSTDISASTER HOME APPRAISALS
The Iowa House of Representatives passed a bill that critics said will make it harder for homeowners to successfully submit insurance claims for damage caused by natural disasters.
The bill would limit the appraisal process used in disputed claims to only determining the cost of the damage to the home. Appraisers would no longer be able to determine what caused the damage.
Critics said that would force more Iowans to go to court to have their claims resolved, rather than using the appraisal process, which is typically faster and cheaper.
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