In The Know Podcast: When the market gives you lemons …
November 2022
DENNIS LEE: Markets, portfolios and investments can be easy to misunderstand. So on the show today, we'll bring you a few minutes from each of BlackRock's top thought leaders to help explain what's happening in markets in simpler terms. Here's what have on the agenda. First, Interesting Numbers with Mark Peterson, Director of Investment Strategy and Education. How do I make sense of market swings? How do markets perform in midterm election years? And what could happen if we entered a recession?
Next, we’ll have our featured segment on making lemonade from lemons with Danny Prince, Head of iShares Product Consulting. What juice is there to be squeezed? Well, it turns out viewing your portfolio with a tax lens is probably the best thing you can do right now. We’ll hear from him and why he wants to rename Tax Loss Harvesting season.
And then last. What should I do? Most often than not, markets are a long game and staying calm amid the storm is your best bet. But still, we often hear … Yeah, yeah. But really, what should I do? So we’ll bring on Carolyn Barnette, Head of Market and Portfolio Insights, to take everything we've heard and try to answer that question for you as an investor. And that's it. Hopefully, by the end, you'll be speaking the language of markets just a little bit more fluently. I’m your host Dennis Lee. Welcome to BlackRock's In The Know Podcast.
DENNIS LEE: It's now time for a segment we call 'Interesting Numbers.' It's the most interesting segment with the most boring name. We're joined by Mark Peterson, Director of Investment Strategy and Education who publishes his popular 'Student of the Market' piece, which covers historical insights each month. I highly recommend checking that out on BlackRock.com. today. Mark, I just wanted a little bit of therapy. Markets are tanking, doing very poorly. What can you tell us about what's been happening this year?
MARK PETERSON: Yeah, certainly historical, Dennis, when you look at the numbers, both on the bond and stock side, unfortunately. Just starting with bonds, they're down about 14% through September, which was the worst start by far ever in the bond market, down that much from a total return basis. You look at the worst year ever for bonds was 1994, down a little bit less than 3%. So think about that.
Right over 14% loss for the Core Bond Index where, historically, the worst year ever is down less than 3%. And that goes back 95 plus years of good data that we have. And on the stock side, not much better, fourth worst start ever, fourth worst start ever for stocks, only 1931, 1974, and 2002 were worse. We're down almost 24% through the end of September.
So, obviously, that combination's pretty rare. You rarely see stocks and bonds down in the same calendar year, right? Usually, one zigs while the other zags.
If you look back, historically, we've only had two calendar years in which both stocks and bonds lost money in the same year. That was 1931 and 1969. So unless we get a furious rally here in the fourth quarter, we're on pace for, really, the worst year, combined year ever for both stocks and bonds. We've had, certainly, years that were worse for stocks. But, certainly, this level of loss along the bond side-- this level of loss on the bond side and the fact that stocks are down in bear market territory, truly unique.
But I do think it's going to be an opportunity at some point, right? You just look back historically. And you get these historical outliers, like we're seeing on the bond side.
I think, you've got to think about putting money back to work here, right? It's just so odd to have such a historical leap from what normally happens with total returns on the bond side. I just think, oftentimes, those periods can be a buying opportunity, not necessarily something to just pull to the sidelines on.
DENNIS LEE: You talk about the numbers of the worst performance for a 60/40 portfolio in recent memory. It does seem like there have been an awful lot of swings.
One day we're hearing about losses in the stock market. And then the next, we see a big rally. And that's the big news story of the day. What does volatility look like this year?
MARK PETERSON: Yeah, no surprise, right, given all of that bad news, there's a lot of volatility. We measure it with 2% trading days, right? We don't use the VIX, the volatility index, because I can't explain what that is. But we use 2% trading day, so just any day the market's up or down by 2% or more. And we've had 33 through the end of September.
And just to put some context to that, we had seven all of last year, 44 back in 2020 when the pandemic and the shutdowns were setting in. So very similar pace to what we saw back in 2020 but nowhere near what we saw back in 2008 when we had 72 days that were plus or minus 2%. And the market's open about 250 days a year. So 72 days, back in 2008, that was one every three or four days, we were getting a 2% move.
I think, one thing interesting, I've talked to a lot of folks about-- across the country, is the fact that, you'd think with the market down almost 24% on the stock side that they'd all be bad days, right? You'd think those 33 2% moves would all be on the negative 2% or mostly on the negative side. But they're actually split pretty equal.
Through the end of September, it was 15 positive days and 18 negative days. And this is something we always see with volatility. When you get into periods like this where the market's really swinging back and forth like that pendulum, it's a lot of good and bad days sitting right on top of each other, right?
All the-- some of the negative returns aren't driven all by negative 2% days. You have some really good, positive 2% days as well. That's one thing that always makes timing the market so difficult, right?
It's the old market adage, time in the market, not trying to time the market, because, even in a period like this, if you move out, you might miss some of the best days on the other side, which is just going to make the bear market even worse. So I think, that's something we always try to highlight with folks is, in periods like this, more important than ever to stick with the market. Don't try to time it. You don't want to miss those best days on the other side.
DENNIS LEE: Mark, super interesting and another reason why, as you said, getting out of the market isn't always the best strategy during these times. Talk to us a little about inflation. We know that's been driving a lot of what the Fed is doing and affecting both stock and bond markets. What does inflation have been looking like?
We know that we have seen another what we call, I suppose, a high CPI print this month. But what does inflation look like to you, according to history? And where will that take us?
MARK PETERSON: Yeah, certainly, inflation's still lingering, I think, more than folks hoped. But we are starting to see a little bit of a down trend, right? It peaked at 9.1% back in June. We're down to 8.2, here, in September, so certainly down, maybe, not as much as everybody hoped, I think that's always somewhat of the challenge with inflation, tends to be a little bit stickier than everybody hopes, right? It goes down a little bit slower than it goes up.
But I think the good news is, you go back historically and you look at performance for both stocks and bonds following peak inflation and, generally, the returns are pretty darn good. Just going back in all the different peaks in inflation, if you look on average, stocks are higher, 21% one year later. Bonds are higher on average, 7% one year later.
And I think all those periods were positive one year later, with the exception of 2008 during the global financial crisis. You peaked, with inflation, at a little bit over 5%. And stocks were down about 20% the next 12 months. All the other periods, whether it was in the '80s or '70s, stocks were higher and fairly significantly higher, following that peak in inflation. So certainly the hope there is that we're closer to the end than the beginning, both from an inflation standpoint and, both a stock and bond performance standpoint, right?
That we've priced in a lot of bad news. And, really, you think about it, we touched it on the bond side, right? Probably, not a bad time for folks to think about putting money to work, right?
You've got bonds down historic levels. You have stocks, certainly, down in bear market territory. If you look back, historically, anytime buying stocks at 20 plus percent discounts from-- on their price from the beginning of the year, that's smiled favorably on folks over a longer term time period. So I really think folks-- to your original point where you started, I think, we've priced in a lot of bad news. Maybe, it's the time to start thinking about taking advantage of prices at these levels and getting money back to work, making sure we're well positioned for the other side of when we get there.
DENNIS LEE: That's right. Earlier we were talking. You mentioned that there are a few types of recessions over the course of history.
And we haven't even designated the current market or-- as a recession. We may see one in the next couple of years. But it seems like this is a time period where the market is pricing in an inevitable recession. And that that may actually bode well for markets over the next few years.
MARK PETERSON: Yeah, no, it's a great point. I think this is one of those where every period is a little bit different, right? How much does the market price in the recession before it happens?
I think we're doing that a lot right now. If we don't have a recession, if these two negative quarters of economic growth aren't determined to be a recession-- which it can take a while, right? It'll take the next year till they actually put the official proclamation on it.
If that's not a recession, we've already priced in a pretty good decline in stocks already. Even if we get a recession in 2023, we might have priced in a lot of the pain already. And you see that historically where, sometimes, you can see the recession coming, right? Sometimes, it's very clear and evident. And other times, it's more a surprise, especially from the severity of the recession, right?
2008 is a great example, in the global financial crisis. I think everybody saw the weakness in the economy. But they underestimated how bad it could be that you had Bear Stearns and Lehman Brothers fail. And you had more of a financial crisis that anybody would have anticipated. And you saw a lot weaker performance in stocks, during that recession, than you saw in some of the other previous periods, because it was such a surprise.
So I think-- this time around, I think everybody can see it coming, right? Can see the weakness, can see the fact, the Federal Reserve's raised short term interest rates by a historic amount. That's clearly going to act as a brake on the economy.
So I think we're pricing this one in with-- pricing in a lot of that pain in advance, where we might actually get to the recession and might actually see stocks rebound a little bit, stocks and bonds for that matter, rebound a little bit, just because, you'll get to the point where the Fed might take a pause and stop raising short term interest rates, eventually, might ease and cut interest rates, if the economy continues to struggle. All those things could be good for both stock and bond performance. But I think it's a great point you bring up.
It's just, every period's a little bit different. How much the market prices in it advance does vary from period to period. I think, clearly, with the performance we've seen year to date, we're pricing it in advance.
DENNIS LEE: I want to go back to a point you made earlier, which is that stock market returns and bond returns have actually been fairly strong after peak inflation hits. Why is that? Is that related to what the Fed is doing? Or what's your theory on why performance tends to be strong after peak inflation?
MARK PETERSON: Yeah, following peak inflation, I think the main driver is just the expectation that interest rates are coming down. Certainly, some periods, you had higher interest rates to help, especially in the bond side, buoy returns. So you had periods in the '70s and '80s where you had double digit interest rates. So just that income alone was a pretty big boost to two-year return on your bond side. On the stock side, I think it is the expectation that interest rates come down. Stocks look a little bit more attractive. And that's been good for performance going forward. So you see that pretty consistently throughout history, following peak inflation, even when inflation was at pretty high levels, right? Stocks did pretty good after the fact, after inflation started to roll over.
DENNIS LEE: Well, certainly, a lot of interesting numbers for us to digest here, Mark. What can you tell us, from your data, in terms of how markets perform around midterm election season?
MARK PETERSON: Yeah, midterms, always a big topic of conversation here, this time of year, a lot of commercials, and a lot of drama with the elections. And you look back, historically, midterm election years are pretty bad for stock market performance. It's below average, pretty substantially, when you look back historically. About 8% returns on average for those midterm election years which is well below a 10% average for stocks over a long period of time.
And interesting, if you look, the first three quarters of the year are, basically, flat in these midterm election years. So on average, performance in stocks doesn't go up or down. Or it doesn't go up at all in these first three quarters, on average.
But the fourth quarter, once you get to October, and you get to the election, and pass the election, returns for stocks are really good. You can see, in our 'Student of the Market' piece, we highlighted the performance in the fourth quarter is-- in midterm election years, is by far the best performing fourth quarter of any of the presidential election year cycles. Normally, average around 3% in the fourth quarter, midterm election years you average six. So you think about that, that really sticks out like a sore thumb as well.
Granted, some of that might be just a coincidence that you happened to get some good fourth quarters. But I think, there might be some truth to the fact that the election weighs on folks a little bit, some self-inflicted wounds, that we create a little bit too much drama in some of these presidential election years. And that doesn't really wane until the fourth quarter. As we get close to the election, get after the election, performance starts to come back in stock. So, hopefully, we'll see that play out again this fourth quarter.
DENNIS LEE: Yeah, Mark, as you're mentioning, I suppose it could be luck. But that's been measured over, I think 24 midterm election cycles, right? And I think, part of the uncertainty that you're talking about is that the house tends to change parties.
It has so, I think, for the last 22 or the last 25 midterm elections. And so, I guess, the theory goes that, markets leading up to the election are just uncertain about what's going to happen. And then, once the result becomes more clear, markets seems to adjust better to that certainty.
MARK PETERSON: Yeah, no, that seems to be the case. Again, you think about 24 midterm elections, that's not a huge sample size, though, so at the end of the day. So you certainly have some big periods in there where it's switched.
You look at some of the worst starts, historically, to a year in stocks, I think we were talking about the four of the worst starts for stocks, including 2022. Three of those four years have been midterm election years, which is interesting. So, clearly, there's something going on there, right? It's not a huge data set. But it's-- whether it's economic weakness or just even, like you mentioned, some of the uncertainty and turmoil around some of that political noise in the short term, it certainly seems to be the case with the midterms.
DENNIS LEE: Thanks again, Mark, for joining us on the podcast. We'll see you next time.
[00:17:05.42] MARK PETERSON: Thanks, Dennis.
DENNIS LEE: I'm now joined by Danny Prince, Head of iShares’ Product Consulting for our featured segment on tax loss harvesting. It happens that it is harvest time around now and November. But this is often the time where we talk to clients about tax loss harvesting, which Danny would contend, maybe, has the wrong name. But I'll let him cover that.
Danny, thank you for being on the show today. And I just wanted to start by asking you, what is tax loss harvesting? We've heard a lot about it that we should do it, especially now. But I just want to get to the basic question. What is it exactly?
[00:17:46.96] DANNY PRINCE: Yeah well first off, thanks for having me on the show here. And you're right, Dennis. This market sell-off has really created this opportunity. And the industry has talked about it a lot.
But simply put, tax loss harvesting strategies are taking an asset that you have that's down in value-- which, it feels like there's plenty this year-- and taking that asset, and selling it at a loss, realizing that loss, whether it's a single stock, a bond, mutual fund, ETFs. You could sell that asset. And it has to be in a taxable account.
That's the important thing there. And what you do is, you take that loss. You redeploy your cash. You stay invested. And you can effectively use those losses to offset future gains, current gains, and, in some cases, ordinary income.
So you can create an asset from a tax perspective. The goal is to stay invested, so you don't miss out on any market rebound. But, effectively, add some value when it's hard to find in declining markets, like we've seen this year.
DENNIS LEE: So I've always been told, you should never buy high and sell low. That's how you lose money. So that's not exactly what's happening, correct?
DANNY PRINCE: Correct, right, the key-- and, maybe, we need to rename this strategy, because, if I told my father he's going to harvest losses, I think he's going to-- he thinks he's going to just take home losses. And that's it. He's going to call it a day.
This is about, when your asset is down, you are already-- you have unrealized losses. But they don't do anything from you first, from a tax perspective. Realizing them can be used to offset other gains in your portfolio or up-- ordinary income up to $3,000 per year.
But what you don't want to do is sell and be out of the market. So this is where it gets tricky. When you sell the asset that's down and realize loss, you want to redeploy that as soon as possible and, ideally, in something similar. So if you do see a rebound in the market, you participate. So you are actually riding the wave of markets, as opposed to getting out of the markets.
This is not a timing exercise. This is not getting out of the market exercise. This is simply taking advantage of tax laws to offset future liabilities.
So let's rename this here on your show. I'm going to call this the tax offset strategy. And now my dad is super interested in offsetting losses. And we never have to call it a loss harvesting strategy again
DENNIS LEE: I think, the important distinction there is that, before the advent of mutual funds or ETFs, this strategy was a little bit harder to deploy, right? If you had individual stocks, as you mentioned, and you try to sell out of it, and you had to buy a different stock, it would be hard to achieve the same type of returns. Like, if you didn't want to change your investment strategy, but you still wanted to be invested, it was harder to do so. So what's changed the game? When did that shift happen? And why is it such a common practice now?
DANNY PRINCE: Yeah, right, I think two reasons why, now, you see the strategy being utilized more. To your point, if you built a portfolio in the past, if you go back decades before pooled vehicles, you generally had a few stocks. And that was your portfolio.
Financial advisors usually had high-conviction stocks. And if you sold out of that stock, and you have to be out of the position for 30 days to realize this loss, that stock might have moved on you. And if you bought a different stock, it had different risks. It had different return profiles. You would have missed out.
That's how portfolios were managed. You held a few single stocks that didn't make a lot of sense, because you would effectively change your strategy to take advantage of those lost tax offsets. We're calling them tax offsets, remember, right?
But today, with pooled vehicles, money's being managed differently over the last couple of decades, than the prior few. And that is, it's thinking about asset allocation. It's thinking about stocks, versus bonds and mix, not one stock versus another stock.
And because of this, you have pooled vehicles where you can find similar exposure, but not substantially identical, which is part of the rules for this strategy. You can't buy something substantially identical. So, really, ETFs have become a preferred tool for this. The ease, the transparency, the low cost, the tradeability has really made this strategy more accessible.
And it's not just stocks or equities. This is something you can do in bonds and commodity. You could do this across the portfolio today, easily, with ETFs.
DENNIS LEE: Right, so that 30 day period was important, because, if you sold it, you had to hold your breath, and hope that the stock didn't rally, and that you miss out on those returns. We heard from Mark Peterson that a lot of the negative trading days are often followed, or very closely behind, follow positive trading days. And so, getting right back in is one really key point there.
We've heard this opportunity to tax loss harvest, it seems like it's a strategy that we've been told, we should be looking for opportunities every year. And, maybe, in other years, outside of 2020, it's been hard to do this, because not many people have had unrealized gains over the last 12 or 13 year bear market. We hear a lot about this being a generational opportunity to harvest losses. Can you walk through why that is and why it's so important, particularly this year?
DANNY PRINCE: Yeah, typically, you see this strategy more with stocks and equities because of the volatility you're more likely to experience in the stock market. But what makes this a generational opportunity is, most investors have been building stocks versus bonds portfolios. So how much do you have in bonds, versus stocks?
And we call that asset allocation. And, generally speaking, the more conservative you are, the more bonds you hold. That's how portfolios are constructed.
Well, this happens to be one of those unique years. And we haven't seen this since the '20s-- the 1920s, I should say now-- where stocks and bonds are both down at this magnitude, right? What's been impacting the stock market, usually. Volatility helps the bond market. But this is the year where the bond market volatility is creating stock market volatility.
By that, I mean, interest rates have risen this year. And that's caused bonds to go down. It's also caused equity market volatility.
So the generational opportunity means, essentially, you can look across your whole portfolio. And you can see the opportunity to tax lost harvest throughout your entire portfolio, where, normally, it's more focused on the equity side. So it's that.
It's also the magnitude. We're sitting here at double digit declines in the bond market. We're sitting here with over 20% losses in the broad US equity market.
So it's also the depth of the drawdown that we're seeing that creates this opportunity. The more losses you have, the more tax offsets you can bank. So this is why we're calling it the generational opportunity.
And, look, let's be honest. Markets haven't been delivering performance for clients this year for investors. And this is the opportunity this year, all right? Markets are providing a lot of headwinds.
But here's a tailwind to help position a portfolio for the future. These tax offsets can be kept in perpetuity. You can use them each year to offset ordinary income, if there's not gains to offset. So from a tax perspective, this is an asset worth unlocking.
And, really, I've been telling financial advisors that a bird in the hand is worth more than one bird in the bush. And that's what this opportunity is. You take advantage now while you can and, especially, before year end and while markets are down.
But, again, to your point, you stay invested. This isn't about shifting and getting out of the market. This is about taking advantage of certain tax dynamics for taxable investors for their taxable account.
DENNIS LEE: Thanks, Danny. Maybe the last question for you, there's a temptation to hear all this and say, even if we're renaming it tax offsets, versus tax loss harvesting, it doesn't seem like a happy topic for us to be discussing, taking a loss. What would-- how do we internalize this so that doesn't feel so bad, because I feel like the temptation is to do nothing and ignore it? What would happen if I did nothing over the next 18 months? Would that be so bad?
DANNY PRINCE: Well, it depends on how you approach taxes. For me, in my personal pursuit of financial outcomes, I like to think, it's not what's in my account on January 1st. It's really what's in my account mid-April. And for me, being able to quantify and see the losses and see the gains that I'm offsetting helps understand the value that I'm driving in my portfolio.
The challenge that you just spoke to is, we do all of this activity. And it doesn't really hit our brokerage statement as much. It hits our 1099. And that's where you see the value. And that's hard to see.
Taxes get jumbled with everything, right? You and I both have kids. And we know how messy our tax forms have gotten. And I've got California taxes to contend with and houses. And tax forms are ugly. And it's hard to see.
But, really, if you didn't do this, and, let's say, markets rebounded, and you rebalanced your portfolio, and you had gains in the future, those gains could have been offset with losses that were built today. So it's not going to help me buy more Christmas presents this year. But as it feeds through my taxes and future states, and offsetting ordinary income each year-- remember that component-- more on the account after we consider taxes.
DENNIS LEE: Yeah, that's the hard thing, because we-- even I tend to look at the number in the brokerage account and how much up or down it is, versus how much less I paid in taxes and calculating that number, versus how much was in my brokerage account. And so, behaviorally, that's just the challenge to say, this makes sense. This will benefit me.
But to actually act on it, talk to a financial advisor to implement the strategy is another thing. So I appreciate you illustrating that for us. Well, thank you, Danny for joining the show. I appreciate your time and happy offsetting season.
DANNY PRINCE: That's right. Thanks, Dennis. Have a great day. All right, see you, Danny.
DENNIS LEE: OK, so onto our last segment, what should I do? Most often than not, markets are a long game. And staying calm amid the storm is your best bet. It's certainly been a stormy year.
But still, we often hear, yeah, yeah, but really, what should I do? So we'll try to take everything we've heard today and try to answer that question through Carolyn Barnett, Head of Market and Portfolio Insights at BlackRock. So Carolyn, thank you for joining us. And thank you for helping us answer the question, what should I do? What should I do as an investor in today's environment?
CAROLYN BARNETTE: Absolutely and Thank you, Dennis, happy to be here. The first thing you should be doing, as an investor in this market, is trying to make lemonade out of lemons. It-- we've had a really tough year this year, as everybody listening to this probably knows.
We've got only 3% of mutual funds and ETFs that are actually positive on the year, year to date, which is an extra, crazy statistic, if you consider, there's about 28,000 mutual fund and ETF tickers out there. So only 3% are positive year to date, which means, pretty much all of us are down, unless you started the year with a truly absurd portfolio of energy stocks, Latin American stocks, and utility stocks, so really, really rough year.
What you can do about it is, there is actually an opportunity here to tax loss harvest. And it's absolutely critical. We don't have a lot of opportunities like this. Equities, certainly, bounce around enough.
But bonds don't tend to. And bonds are down 15% year to date. And so, you should look at your portfolio, see which funds or holdings you have that are down on the year, and harvest those losses. At the least, you can swap them into other similar funds, maintain the exact same exposure, and just harvest those losses, either net them against capital gains you've realize elsewhere, or net them against your income coming from other sources. But what you should really be doing is using them, using those losses as an opportunity to reshape your portfolio.
There are very few taxable investors who have the exact portfolio that they want. We all get stuck in positions that were once interesting, and then we got stuck in because we bought them at a low-cost basis and got stuck with those gains. Well, you now have losses that are available to adjust the rest of your portfolio.
And so, on the one hand, you can look at those positions and just screen out all of the funds or all of the positions that you don't like anymore, where the investment thesis doesn't make sense to you, where the allocation doesn't fit for where you are in life. The other thing that you can do is take into account that we are now in a whole new world, when it comes to investing.
For the last decades, we've been in this growth-led market where tech has kept coming up. Growth has been the place you've wanted to be. Value has not done as well. Defensive equities have not done as well.
As we've experienced this year, that is shifting with interest rates rising. That makes it a lot more challenging for growth stocks to deliver on that growth. It's gotten a lot more expensive to buy future growth.
And so, now is a really good time to, one, trim back some of those higher octane positions. We don't think markets are going to get any less volatile any time soon. And so, you can shift out of those higher octane positions into more defensive equities, like high quality dividend payers, minimum volatility stocks, things of the like.
The other thing that you can do is, really, step back and revisit the asset allocation you have in your portfolio. And by that, I mean, how much of your portfolio is allocated to stocks, versus bonds, because, on the one hand, stocks tend to be more volatile than bonds? They've also tended to deliver higher returns than bonds over time.
But what we've seen in professional investors over the past few years is this trend towards leaning into more volatile portfolios, riskier assets than they've had in the past, because we've had this unique situation where fixed income or bonds have not yielded a lot. Their income has been low. Their expected returns have been low.
And so, to make up for that, where, a year ago, fixed income was only giving you, maybe, 1%, maybe, 2% if you were lucky in returns. The other benefit of what's been happening in markets is fixed-income yields have gone from 1% up to 3%, 3.5 4%. You can now get a really attractive yield on those higher quality, shorter duration parts of the bond market.
So what that means for you and your portfolio is that it's possible, if all you're trying to do is generate a 5% return on your portfolio, you can do that in a much lower risk way than you have in the past. You don't have to have that same higher allocation to the more volatile stocks. You can increase your allocation to those higher quality, less volatile bonds.
So if we were to step back from all of that, what do you do? Piece one, make sure you've tax loss harvested in your portfolio. You've got until the end of the year to do it for 2022.
So look through your portfolio for those opportunities, those parts that are down for the year. Sell out of them. Harvest those losses. And then use them to make your portfolio better, bring down volatility.
If you feel like you've got that right asset allocation, just do it within your stocks. Cycle out of some of those higher octane stock positions into more defensive, higher quality stock positions. If you find that you actually don't need to take as much risk as you've been taking, if your return target has stayed the same, take advantage of the shifting market regime. Lean more into those high quality bonds that can now, really, earn their weight in the portfolio to drive the returns that you need.
DENNIS LEE: Super helpful, Carolyn. In the current market environment, there's a sense of helplessness. As we've seen, markets have performed so poorly, both from stocks and bonds.
We now know, it's not just me who's having a hard time. Of course, everyone's having a hard time with their portfolio. There's this feeling of helplessness, if there's nothing really to do.
But I'm hearing you say, there are certainly things we can do. And the first is to harvest those losses, gain those tax benefits. But, second, this is an opportunity to make sure that your portfolio is working as hard for you as possible, so keeping that long term perspective.
But there-- the opportunity that tax loss harvesting gives us is to redesign portfolios exactly the way that we'd want to, so selling out of those, maybe, riskier tech stock positions, buying into bonds, which, over the last few years, almost felt like there was no reason to own them. Now there's a reason to own them, because they're less risky and can yield, as you were saying, potentially, up to 3%, 3.5% And so, it feels terrible. But what I'm hearing you say is that, right now, indeed, those lemons can be turned into lemonade by those two strategies.
[00:38:12.81] CAROLYN BARNETT: Yeah, absolutely, bonds are back, as you've said. We've loved to hate bonds over the last few years. And this is a great opportunity.
It-- don't let yourself get scared away from bond investing. This is a year where past performance, particularly in bonds, really, doesn't predict future results. As interest rates have gone up, bond prices have gone down. And we are now at a point where, one, yields aren't as low as they were.
So one of the reasons that it has been so painful to be a bond investor this year is, we started at a really low yield. And so, even a small amount of rise in interest rates was enough to eat through that yield, and have you lose money on your bonds, and lose money on your bonds in a really big way. When you get to a higher starting place, instead of having a 1% yield cushion, now you've got a three 3%, 3.5%, 4% yield cushion. That gives you a lot more space.
So even if we do continue to see interest rates rise-- and we're at the point where the Fed has really forecasted what it's planning on doing. We think that, at least on the front end of the curve, Fed moves are pretty much priced in.
There's not as much that can go wrong in the bond space. And if it does go wrong, if interest rates rise more than we expect, you have more of a yield cushion to cushion that fall.
DENNIS LEE: Would you be happy with a 5% return on your portfolio? We're hearing inflation is up around 8% right now. Are you happy with a 5% return on a portfolio?
CAROLYN BARNETTE: Well, tech stocks are down 37% year to date. The S&P 500 is down about 24% year to date. So yeah, I'd be pretty happy with a 5% return on my portfolio.
Longer term, it depends on what you need. It depends on how you're spending needs might change over time. It depends on how much you're drawing from your portfolio.
But if 5% is enough for you to live off of and the particular things that you spend money on, whether that's housing, whether that's food, clothing, leisure, if your expenses aren't moving by 8%, then, it's OK. But everybody's return target is going to be different. And you should work with your financial advisor to figure out what the right return target is for you.
DENNIS LEE: Yeah, I think that's very wise, because I think, when people think about investing, and they look at inflation, they look at how markets have performed so poorly this year, there's a sense of how-- why invest at all? But I think, these are the important years that need to be weathered, that need to be thought carefully and thought through carefully. And stay invested in the strategies that you mention. And do things like tax loss harvest, because, as we've seen, we had a 13 year bull market run, right?
We had 13 years of growth that nobody expected. And so, markets will behave this way. And in the years that we don't experience better than expected returns, these are the things we need to do to mitigate those losses and to make the most of it.
CAROLYN BARNETTE: Absolutely.
DENNIS LEE: OK, well, Carolyn, thank you. Thank you for being on the show. As always, really helps to have that question answered, what should I do? And would encourage everyone listening to talk to their financial advisor about how to execute that. But thanks again for coming on the show, Carolyn.
CAROLYN BARNETT: Absolutely, thank you.
DENNIS LEE: And that brings us to our closing bell. That was the sound of a snickers bar left over from Halloween, tapping on my office window. Once again, we don’t have an official sound effect for our closing bell, but I’m trying to build intrigue. You’ll have to tune in to future episodes to find out what random item I choose to clang next.
One quick note before we close. Talk to your financial advisor, if you have one. There is so much educational content out there, and some of it is great, some of it not so much. But achieving your financial goals is often a very individual journey, and at BlackRock we believe those goals are best met with the help and advice of a financial professional. All of the topics we’ve covered – including staying invested, tax loss offsetting, considering defensive equities – all of these ideas are recommendations in a vacuum if you aren’t carefully considering your own long-term goals in partnership with a professional.
And that’s all the time we have for today. This has been Dennis Lee, market insights lead for U.S. Wealth at BlackRock. We'll see you next time on BlackRock's In The Know Podcast.
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