Weekly Comment- March 21, 2022

March 21, 2022 | Nick Foglietta


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Emotions of Money

 

As a long-serving investment advisor I have witnessed almost every imaginable relationship a person can have with money. I have seen both healthy and unhealthy relationships and how they can impact people’s lives.

Money/currency/wealth is at the center of virtually all business stress and concern. Even at the personal level, beyond health concerns, money tends to be the focal point to the life we wish to lead. Debates about inequality and oppression usually end up being access to money issues too.

So it does not come as any surprise that humans have a multidimensional relationship with money. There are those with lots of wealth constantly wanting more and those with little who are content. To some their money is a means to an end and for others it is a way of keeping score. Often, how you were raised will influence how you view money and wealth.

One of the most memorable moments of my working life as a young advisor in the 1990s was getting a call from the spouse of a terminally ill client that he wanted to see me. We had spoken a short time before on the phone and made sure that his affairs were in order. I drove to the client’s house that afternoon thinking that he had thought of something that needed to be corrected in his estate planning.

The client just wanted trade some stocks and was worried that rising interest rates would push his bond values lower.

Honestly, I was at a loss for words. As this fellow was facing eternity he was still worried about his portfolio valuation and investments. But as I thought more about my relationship with this fellow, it actually should not have surprised me. He loved his money and it was what his entire “net worth” was formulated around.

I believe it is fair to say money is randomly emotional and personal. We relate to it through our own lens of experiences and values.

So let’s talk about you for a moment. The questions I am about to ask are for you to answer to yourself. Be completely honest with your answers and you don’t have to share them with anyone else.

  1. Do you have a positive relationship with your money? Maybe you never thought of that before? Do you spend more time thinking about your money (or money in general) than you care too?
  2. Are you comfortable with how your portfolio and assets are positioned at present time? Does what is happening to financial markets or in geopolitics enter your thoughts more often than you would like? Or do you find it all interesting and more hobby-like?
  3. Would you shift (up or down) the way your portfolio is positioned? If question 2 is a “no”, what do we need to do about it to make it a “yes”?
  4. What does your money/net worth need to do for you and your family in the next 10 years?

The most important way to consider these questions is through the lens of time.

If you have a longer term time frame it is much easier to sit back and relax during a recession and market downturn knowing that the cycles in financial assets tend to work their way from bottom left to top right on the graph.

The chart below illustrates this point nicely.

 

 

It is clear to see that BULL markets are longer in duration than BEAR markets. Long term investors enjoy the mathematical benefits of this chart.

But you need to see the math for what it really is too.

Remember, a 50% decline in value requires a 100% recovery to break even. So when you look at the 49% decline in 2002 and the 102% recovery until 2007…the buy and hold S&P 500 investor broke even over that time frame.

The global central banks are in the proverbial penalty box now for a pile of infractions they committed during the past two years. They are doing their best to “talk like Paul Volker but are still behaving like Ben Bernanke.” (Paul Volker was the 1970s central banker who raised interest rates into the high teens and took the wind out of the inflation of that period. Ben Bernanke was the guy who did his best to build the edifice of debt and inflation we face today).

Interest rates are ratcheting up BEFORE the central banks have really influenced the debt markets with their policies. This is a direct response to inflation. Mathematically, inflation is in the process of peaking. The problem is that it is peaking far above the present interest rates. How far and to what level inflation subsides is not easily estimated but the range of outcomes will have a huge impact on our investment portfolios.

The rally in financial markets have created a good opportunity to rebalance portfolios. (I sent a special note out on Wednesday last week encouraging you to take a look at your portfolio in this manner).

If you want to chat about this with me please either email back or give me a call.