Invested for the Long-Term, Living in the Short-Term

Market Reflection | June 17, 2022

Stocks moved lower this week as markets digested the Fed’s aggressive rate hike of 0.75%, and concerns about a recession were bandied about in headlines. For investors, watching the value of their portfolios decline is often uncomfortable, which highlights a fundamental challenge during periods of market turbulence: we are invested for the long-term, but we live our lives in the short-term. We read headlines, plan weekend getaways, and move about our day-to-day life in the context of the present. When problems arise, we are inclined to take action to resolve them. Today, inflation at the gas station and the grocery store serve as visible reminders that the economy is in a period of tumult. 
These periods of volatility are precisely when the seeds of future growth are planted, but that doesn’t mean it is easy to remain focused on long-term innovation while experiencing price declines and uncertainty in the present. However, history has repeatedly shown that staying invested is the surest path to financial security and flexibility.

Plenty of Headlines

This week, the S&P 500 re-entered a bear market – defined as being down more than -20% from its prior peak – after giving up some gains from prior weeks. Diversified portfolios have held up better than the declines of broad stock indexes. Contrary to current market sentiment, history shows that investors who stay invested or add additional funds when the market crosses this symbolic bear market threshold have benefited from strong forward returns when economic growth recovers.[1] 
Another key headline this week was confirmation of the Fed’s larger-than-expected interest rate hike. Despite the fact that rising interest rates tend to push asset prices down, the primary goal is to get inflation under control and the decision to increase by 0.75% reinforces the Fed’s willingness to fight inflation with actions rather than words. Estimates now show the Fed Funds rate reaching 3.4% by the end of the year, representing further increases of 1.75%. Despite Fed Chairman Jerome Powell’s fairly optimistic commentary on Wednesday, investors worry that inflation is persistent and the fix is likely to cause a recession. 
To complicate the landscape, central banks around the world are beginning to raise rates at the same time.[2] Earlier this week, the Swiss National Bank increased rates for the first time since 2007. The target rate in Switzerland remains negative, at -0.25%, but the surprise move symbolizes a new trajectory for global monetary policy. The Bank of England also raised rates by a quarter point this week, its fifth increase since December.  
One headline, in particular, captures the real-world impact of these central bank decisions: In the US, the average rate on a fixed 30-year home mortgage is now 5.78%.  While this rate isn’t high compared to historical levels, it is a startling increase from rates several months ago. This will both reduce demand for new house purchases and limit the ability of current homeowners to refinance or use home equity for additional spending. That is precisely the goal of these higher rates, to “destroy” demand in a way that slows the trajectory of inflation and allows the real economy to catch up with prices. The process might be painful in the near term, but our economy and financial markets have navigated these transitions many times before and always emerged into new chapters of progress.

Process and Culture

Investing success is rarely the outcome of a single good decision. The financial media too often highlight stories of hypergrowth and miracle investments – we saw plenty of this during the pandemic with meme stocks and cryptocurrency headlines – but true investment progress is more often the product of a rational and repeatable process.   
At North Berkeley, we design broadly diversified portfolios that seek growth and mitigate risk by not being overconcentrated in any one area, and then we regularly rebalance to stay on track. This means trimming stocks at higher prices while markets are growing and optimism abounds. It also means adding to stocks at current low prices even as pessimism permeates the news. Steady rebalancing prevents emotions from clouding the ability to think objectively about the long-term opportunities that the market is presenting.  
In predicting the long-term success of a sports franchise like the newly-crowned Golden State Warriors, the combination of “process” and “culture” are often important indicators. Similarly, the success of long-term investing relies on a steady and disciplined process. In the short-term, circumstances evolve, players get hurt, and seasons don’t always end with lifting the trophy – but when the process remains focused on a consistent long-term goal, success often follows.


[1] The Bear Market Is Officially Here. What Comes Next, According to History. Barrons

[2] The Fed Isn’t the Only Central Bank Ramping Up the Inflation Fight WSJ

Brian Kozel, CFP 

About Brian Kozel, CFP®

Brian Kozel is a Partner at North Berkeley Wealth Management. Brian helps clients feel confident as they navigate their financial journey.

Read more about Brian

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This commentary on this website reflects the personal opinions, viewpoints, and analyses of the North Berkeley Wealth Management (“North Berkeley”) employees providing such comments, and should not be regarded as a description of advisory services provided by North Berkeley or performance returns of any North Berkeley client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. North Berkeley manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

By |2022-07-01T09:45:36-07:00June 17th, 2022|