Debunking Misconceptions About Investing in a Slower Growth Environment - 2nd Half 2022 Outlook

We tackle where markets are and provide real perspective for investing in the second half of 2022. As we move into a slower period of growth, we discuss how to avoid falling for misconceptions about investing in this environment. We discuss

• Actual vs. perceived market returns since 2020

• Real portfolio diversification - are you as diversified as you think?

• What's really causing inflation and will that create a recession

• Why growing companies outperform value oriented staples in recessions

Transcript:

 Hey guys, welcome to the six Figure Investor. We're excited to be back with you talking about the mid-year review. Can you believe it is already mid-year, Brian? No, I can't believe it's already the middle of 2022. I know you started 2022 with a market forecast for the year. Yes. So what everyone wants to know is, Who was more correct, you or the weatherman?

I think we were better than the weatherman. Our market forecast coming in of the year was titled Rising Interest Rates will Impact Everything And interest rates have indeed risen and asset prices have gone down. And so I think that we got right, but what I wanted to focus on, As we get into the mid-year is taking our more detailed review piece and breaking it down into four or five misconceptions that I think are out there as we head into a slower economy, potentially a recession.

Talk about some of those topics and kind of bust through some of the myths that are out there for folks as we think about the second half of the year. That sounds great. I love to try to predict the future. We don't predict the future on these podcasts. I said this in our, in our 2022 piece, and, and you'll link that in the show notes for everyone.

And I, well, I think it's worth saying again, so we intentionally don't make forecasts for the s and p 500 or for the economy because as long-term investors, it's not about picking a number for GDP or for the stock market or for the bond market or for any of those things. It's about what's happening over the long.

and making smart investment decisions over many, many, many years. Not trying to be right or wrong over six months or months. So that's what the weatherman says too. Is that what the weatherman says with the, maybe we're just like the weatherman . All right. Well, I know you've structured today's content as a series of misconceptions.

So I can't wait to dive in on those misconceptions and share a little bit more of them with our audience.

Hello and welcome to the Six Figure Investor Podcast. Are you a professional who wants straightforward, trustworthy financial strategies that you can act? Are you entering your highest income earning years and discovering that your personal finances are becoming too complex? We get it. You're a highly competent professional, but you don't have time to go deep on your personal finances the way you do with your day job.

Hi, I'm Brian, and helping professionals make smart financial decisions is my passion. I run a financial advisory practice called the Capital Stewards and work with professionals like you who are trying to cut through. It's time to stop Googling every question you have about money and dive into some real professional guidance.

So let's get moving.

So I know you put together a few misconceptions that people think today and what we should think instead. Yeah. Why don't we start with number one, what is misconception number one, and what should we think instead? So the first misconception is that the market is down since the end of Covid. How is that a misconception?

I'm pretty sure it's down. So the, so the market is down so far in 2022? That's absolutely true, especially if you look at the s and p 500. Even bond markets and other types of assets, maybe except for commodities and gas. But if you zoom out and think about markets as long-term instruments of growth, if you bought a broad basket of stocks, say the s and p five.

In February of 2020, your portfolio would be up 17%. Since February of 2020 Covid has happened, all the turmoil that's happened in the market this year has happened. Your portfolio's still growing at 6.8% a year. Even given all that, if you bought at the bottom during covid, the, the market is up more than 70% since May of 2020.

And, and so that just goes to show that staying invested is really, really powerful. Even through downturns, if you sell and cash out, you may never get a chance to buy back in at those sort of lower levels.

I find that encouraging because as I was saying earlier, this year has been a little bit of a downer in a way between the stock market being down and bonds being down. In addition to what we've seen in regards to inflation. Yeah, and that's our second biggest misconception. I think there's still a lot of folks out there that believe that supply chain issues, leftover issues from the Covid crisis on oil or the primary causes of, you know, 9% inflation, that we saw this, and that's not the full story.

It's clear that while shortages exist in a really small number of supply chains, I think vehicles or furniture may be, for the most part across the economy. We're producing more stuff now in shipping. Than we were before Covid ever started. Um, so it's not actually our ability to produce things at, at 2020 levels that's causing inflation.

It's the fact that we printed a lot of money during the Covid crisis to stimulate the economy to try to avoid a really severe downturn. The amount of economic stimulus that we put into the economy during Covid actually makes the great financial crisis from the early two thousands look small in comparison.

And so all that money wound up in the economy. That created a lot of demand for goods in stores, groceries, vacations, plane tickets, hotel rooms, assets like houses and stocks. And so now the Federal Reserve finds itself in a place to have to raise interest rates, to reduce business expansion, to slow down hiring, to slow down raises, to try to reduce consumer spinning and demand to try to reduce the price levels that we see across the.

So, okay. Tell me. Misconception or not misconception that all of that is gonna cause a recession? Yeah, I think it's, it's too soon to tell what we know for sure. What's more important for investors than recession or not recession is that, is the economy gonna grow faster or slower? And the answer is definitely we're going to get slower growth.

Whether that growth tips us over into a recession or not is gonna be difficult to tell. But we know that the Fed raising interest rates is going to cause things to slow down and that impacts how we invest. And some of the other things we wanna talk about in this episode. So I've always heard this thing and maybe this misconception or not misconception, that in a recession you should buy values docs like these steep consumer steeples that people are.

Yeah. All the stuff that's in the grocery store, right. That you're gonna buy anyway. Right. You still need Ritz Crackers and Coca-Cola no matter what happens in the car. Yeah. Movie tickets. Yeah, movie tickets. I don't know if movie tickets are staple or not. I had always heard that movies did really well in recession since they're like the most affordable form of entertainment.

So instead of, you know, like going to Paris, you just watch a movie about one instead. Yeah, I, I buy, I buy that maybe a little bit. It's like it has Netflix to plan in that. I don't, I don't know. Oh, probably, I probably, I don't know. We've been to movies more lately though, than we have in the last two years, so that is actually one of the biggest misconceptions I've heard from folks over the.

Couple of months, and it's really important as an investor to understand how this actually works. As company profits and the economy downshift into slower growth or low growth mode, growth stocks have actually outperformed some of those staples that we talked about going back in recessions. Going back to the 1980s.

And the same is true even if there's not a recession, and the economy just slows down. And the reason for that is that those traditional sort of value oriented stocks, banks, energy companies, consumer products, and staples, They need the overall economy to grow, for their businesses to grow. They're generally slow to innovate.

They rely on overall economic growth for their profit increases. On the other hand, when you think about growth companies in the technology space or growth companies in healthcare, or even in sort of consumer product areas, they're transforming a particular industry. Um, and so those companies tend to fare better in recessions because they are continuing that transformation regardless of what's happening in the overall economy.

They're not as reliant on the economy to produce growth in their business. They're taking market share from other competitors in the space, and so, It's key to let history and data be your guide to investing in slower economies and in recessions and not conventional. The key is your investments need to include companies that are continuing to grow despite what's happening in the economy.

The key caveat there is making sure that those companies are producing real profits today, not companies that are losing money today and simply hoping to make money down. That's a really risky place to be in a downturn. It's difficult for those companies to borrow and do other things. So it's about finding companies that are growing earnings, that are doing interesting things in the economy, but that are actually making real money today as we go forward.

I think that clarifies a really important misconception for me. What other misconceptions might people have about their investments in a time of recession? Yeah, so I think one of the other things that's out there is that your 60 40 portfolio is fully diversified and you, if you have most, well, let's back up for a minute.

A 60 40 portfolio is generally a portfolio that is, 60% in stocks or equities and 40% in bonds or debt instruments. If you're younger, you might have 70 or 80% in stocks and less in debt, but it's, it's a, it's a stock and bond heavy portfolio, and it's important to think about your portfolio more carefully during rising interest rate environments.

Many individual portfolios still look something like 60% in stocks, 40% in bonds. However, a truly diversified portfolio, especially when rates are rising and. Going to be higher for the long term contains way more than just stocks and bonds. Investors should own assets that do better when inflation and rates are higher.

That includes things like commodities, physical real estate infrastructure like cell phone towers and data centers. Large institutions have been investing this way for more than a decade, and it's important for individuals to sort of to catch up. So more diversification into assets beyond stocks and bonds is really key to building a modern p.

So we've talked about some important highlights of the years thus far in regards to stock market performance inflation. Pending economic slowdown. In some ways we, we should think about our investment portfolios as in response to that. So what should investors be focused on in the second half? Yeah, so in summary, I think it's important to be rebalancing portfolios and making sure that exposure to the growth stocks that we talked about was back in line with your long-term expectations.

Many of those types of companies are down materially this year, and so you may need to sell assets that have done well in other parts of your portfolio, maybe commodities or something. To buy those stocks that have underperformed. And then secondarily, making sure that you're broadly diversified for a higher inflationary higher interest rate environment, which we think is gonna last several years.

That means owning a really broad set of assets in your portfolio beyond just stocks and bonds, and those are the two things we'd be focused on for the second half of the year. Awesome. Thanks so much for looking back with us, Brian, on where we've been thus far in 2022, and looking forward as you think about the rest of the year.

Anything else you'd like to share with our listeners? We'll see you next time.

The commentary provided is for general audiences and educational purposes only. It should not be construed as investment, tax, or legal advice for your specific situation. That's why you should talk to a professional. Hello. Past performance of market results is no assurance of future performance. All the information on the podcast has been obtained from sources.

We deem reliable as of the date of this recording, but it's not guaranteed.