Rethinking Investing

With the stock market slumping, where should you put your money now?

By Judy Martel

Inflation, rising interest rates, a volatile stock market, and the threat of recession. We’ve seen it all before, but not always in the same combination. No one likes to lose money, but regardless of the variety of factors at play, the same question will always arise among investors: Where should I put my money now?

“The very first thing we have to recognize is that humans have a built-in bias to want to do something,” says William Luther, associate professor in the economics department at the Florida Atlantic University College of Business. “No one wants to see a portfolio drop by 20 percent, but as counterintuitive and uncomfortable as it is, the correct answer is often to do nothing different.”

Investors with a welldiversified portfolio in lowfee exchange-traded funds or mutual funds should ride out the volatility better than those who panic and pull out assets in search of something with temporarily higher returns, he adds.

Cryptocurrency, art, wine, and collectibles are always volatile investments; any investor who watched what happened to cryptocurrency this past year knows that all too well. Outsize returns can quickly turn to breathtaking losses. However, Luther says that if investors believe cryptocurrency will indeed be the currency of the future, it could be beneficial to own a tiny amount. “Modern portfolio theory tells us we should have a little bit of everything, but for most people, less than 1 percent of their portfolio holdings in cryptocurrency is enough for now.”

He is cautious about investing in real estate. “Interest rates are moving higher, although prices are moderating and, in some cases, coming down,” he says. “But it’s not obvious yet that investors would make a profit.”

Instead of chasing gains, Luther says there are only two situations that warrant changes in a well-designed portfolio, defined as one that is designed to match an investor’s time horizon and tolerance for risk. The first is that as a person’s income stream declines—nearing retirement, for example—the allocation to bonds should increase because these safer assets don’t fluctuate as much as stocks. The second is when outside returns in one asset class, such as stocks, knock your portfolio out of balance, those gains should be reallocated to other areas to maintain the original proportion of safety versus growth.

All that being said, Luther takes note of one particular economic concern that hasn’t been a factor in the recent past that might require some portfolio reallocation: inflation. “The Federal Reserve has a target of 2 percent [inflation] on average, but they’re telling us it will be elevated beyond that for the next two years and won’t decline until 2025,” he says. “What that means for investors is that they need to think about a small corner of their portfolio that hasn’t gotten much attention, which is cash.” The higher the inflation rate goes, the more it chips away at the value of cash. Investors in a position to reallocate cash into the market or elsewhere should do that, but not at the expense of squeezing emergency reserves or living expenses. Accompanying higher inflation are fears of a recession, which are not unfounded in this environment. “At the very least, economic growth will slow a bit, and that’s a big reason the markets dropped,” Luther says. “Going into 2023, there are a lot of unknowns, including the Russian invasion of Ukraine, and although most of us are seeing the pandemic from the perspective of the rearview mirror, there’s some chance it will come back.”

Lingering supply-chain problems and disruptions in production are also hanging around, says Luther. “The good news in the supply chain issues is that they are much less severe than they were in late 2020.” Nothing will be fixed immediately, but there is progress going forward.

“We can look back over the past year and see that bad things happened to our portfolio, but we have to understand that all of that has already happened,” Luther concludes. Sticking to the long-term strategy rather than reacting to the past is the best bet going forward. “If investors get nervous and pull out assets, they’ll miss some portion of the inevitable upturn and buy back in when it’s more expensive. They just have to trust the strategy.” «