At some point, in 2021, the pandemic will likely decrease. With a global population less devastated by Covid-19, expectations of an economic recovery are rising.
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 labor market and changes in consumer behavior present unique challenges.
With US stock markets close to historical highs, hopes of recovery are mixed with fears about overvalued stocks on the precipice. To some extent, stocks have recently been more expensive relative to earnings than at any time, even before the collapse of the US market in 1929.
“If customers put new money on the market, we increase dollar costs because of where the market is today,” said Jennifer Weber, a certified financial planner in Lake Success, NY. “It gives customers peace of mind, especially if they are worried about how big the market is now. ”
For long-term investors, equities remain a likely source of gain, even if short-term declines occur. So counselors are trying to find sweet places in a frothy market.
Weber says valuations are more attractive to stocks with value after years of stock growth. Therefore, her team is gradually reducing customer exposure to what it calls “blue-chip growth” offers, such as well-known names in the technology sector, in favor of valuable stocks. “Risk and volatility in growth are at their peak,” Weber said.
To navigate volatile fluctuations, advisors often look at 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, is concerned about rising levels of global debt fueled by massive government spending.
“This could provide a rude wake-up call if we see a reversal from the last two decades of declining interest rates,” he said. “Many investors have never experienced an increase in interest rates. People may not be prepared for this. ”
To mitigate this risk for its customers, 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 stream of income.
“One way to gradually shorten the term in a maturing portfolio is to take a break and not replace maturing bonds with new, longer-term bonds that would normally be purchased to continue the scale.” he said. Short-term bonds tend to be less sensitive to changes in interest rates than long-term bonds.
The Federal Reserve says it intends to keep the reference lending rate close to zero by the end of 2023. But some advisers warn investors not to assume that low rates will remain in effect during that period.
“In real practice, the Fed may fall behind the curve, play the recovery and be forced to raise rates faster than anticipated, especially if there is overheating in the economy,” said Brian Murphy, an adviser in Wakefield, RI.
He adds that rising prices for base metals “could predict higher inflation”, along with huge increases in commodity prices and even bitcoin.
In the rush to take advantage of the post-pandemic recovery, exuberant investors could risk unjustifiably. However, the cardinal rule of maintaining a cash fund on rainy days matters more than ever in this situation.
“Don’t forget your six-month emergency fund,” Murphy said. While earning cash can cause investors to pursue higher returns, he warns that the risk may outweigh the reward of slightly better returns.
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