At some point in 2021, the pandemic is likely to subside. With the global population less devastated by Covid-19, expectations of an economic recovery are growing.
Looking ahead 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 for a return to the job market and changes in consumer behavior presents unique challenges.
With US stock markets close to historic levels, hopes of recovery are mixed with fears about overpriced stocks on the edge of the precipice. On the one hand, stocks were recently more expensive in relation to profits than at any time since just before the crash of the 1929 American market.
“If customers are putting new money on the market, we are averaging cost in dollars because of where the market is today,” said Jennifer Weber, certified financial planner in Lake Success, NY “This gives customers peace of mind, especially if they are concerned with how high the market is right now. “
For long-term investors, stocks remain a likely source of earnings, even if short-term declines occur. Therefore, consultants are trying to find sweet spots in a foamy market.
Weber says valuations are more attractive for value stocks after years of booming growth. Therefore, her team is gradually reducing customer exposure to what she calls “first-rate growth” offers, such as familiar names in the technology industry, in favor of value stocks. “Risk and volatility on the growth side are reaching their peak,” said Weber.
To navigate volatile fluctuations, consultants often look to 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, expresses concern about the steep rise in global debt levels, fueled by huge government spending.
“That could be a rude awakening if we saw a reversal in the past two decades of falling interest rates,” he said. “Many investors have never experienced an environment of rising interest rates. People may not be prepared for this. “
To mitigate this risk for his clients, Henderson is considering a reduction in the average duration of fixed income securities in the portfolio. This can pose a challenge for some retirees or pre-retirees who prioritize a steady income stream.
“One way to gradually reduce the duration of a ladder portfolio is to take a break and not replace the maturing bonds with new longer maturity bonds that would normally be purchased to continue the ladder,” 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 its base interest rate close to zero until the end of 2023. But some advisers caution investors not to assume that low rates will remain in effect during that period.
“In real practice, the Fed can stay behind, catch up and be forced to raise rates faster than expected, especially if the economy overheats,” said Brian Murphy, consultant in Wakefield, RI
He adds that the rise in base metal prices “may portend higher inflation”, along with huge increases in commodity prices and even bitcoin.
In the rush to profit from the post-pandemic recovery, exuberant investors can take undue risks. However, the fundamental rule of maintaining a cash fund for rainy days is more important than ever in this situation.
“Don’t forget your six-month emergency fund,” said Murphy. While earning almost nothing in cash can lead investors to seek higher returns, he warns that the risk may exceed the reward for slightly better returns.
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