As we all know, 2022 has not been a good year for most investors. As of the writing of this article, the Dow is down 19% from January 1, with other indexes showing similar results. And while bear markets have always been with us—and always ultimately recovered—an added ingredient in today’s market that is raising investors’ anxiety is inflation. We are seeing rates of inflation, and actions by the Fed to tame inflation, not seen in four decades. Inflation concerns, plus other factors, have caused great volatility in the stock markets. Volatility imposes “psychological torture” on investors, but that is not its greatest problem. Ultimately, market volatility makes it extremely difficult for investors—and their investment advisors—to generate sustained long-term returns. Are you concerned with market losses?
Mike Zimmerman, CEO and founder of Regal Wealth Advisors discusses what his firm does to mitigate the impact of volatility in order to achieve optimal long-term returns.
Q: Why is volatility so destructive to long-term returns? If a portfolio is up 20% in Year 1 and down 10% Year 2, I still earned a respectable 10% return, correct?
A: No. Say you invested $100,000. After your 20% return in Year 1, your investment is worth $120,000. Now, when that $120,000 takes a 10% hit, it loses $12,000. After two years, you have only earned $8,000, which is a return of a little less than 4% per year. That might be okay in certain circumstances, but you did not average a 10% return over two years.
Perhaps here is a better example: If you made 10% in Year 1 but lost 10% in Year 2, you did not break even. You lost $1,000 over the two-year period.
Q: As an investment advisor, what strategies do you employ to help clients buffer the impact of volatility?
A: First, I want to emphasize that almost all investment advisors do not like volatility. It creates an element of uncertainty that makes it very difficult to achieve good returns. We believe the best we can do for our clients is develop investment strategies that reduce the downside risk of volatility. Second, we craft portfolios that typically outperform negative indexes in volatile markets. These same strategies may cause us to “underperform” in dramatic bull markets, but remember, our goal is to achieve the best long-term return for our clients. To use a baseball analogy, we believe our clients do best by hitting a lot of singles and doubles. We do not swing for home runs and accept a lot of strikeouts as justification for the home runs.
Q: How exactly do you design clients’ portfolios to mitigate the risk of volatility?
A: That’s a great question, but one that is difficult to quickly answer. Each client’s life situation is different, so before we build their investment portfolio, we need to first understand their life’s stage and situation, and we need to understand them as a person. However, what I will say, is that we often employ a very powerful strategy which can provide life insurance and pension-style assets that delivers a reasonable guaranteed return. These investments are typically a good foundation of the client’s overall portfolio, but its value, both in terms of volatility risk mitigation and lifestyle protection, can be huge.
Pennsylvania Location: 190 Cocalico Creek Rd, Stevens, PA 17578
Florida Location: 1990 Main St, Ste 750, Sarasota, FL 34236
717-838-3178 | Fax: 717-838-1202
