Managing Money: Stay the Course to Weather Market Turbulence

The best way for investors to survive the current market uncertainty is to stick to the plans they’ve mapped out with their financial advisers and not panic.

Navigating the Market

“It isn’t a time to start self-correcting during this type of a market,” Core Bank President and CEO John Sorrell said. “Our clients are revalidating the methodology and for the most part sticking with it. If you believe in the methodology, you’re going to have these cycles.”

Volatility in the stock and bond market has impacted the clients of Harrison Financial Services, but this was expected based on the tremendous run over the last several years in stocks and the record low interest rates in bonds, said founder and CEO Tim Harrison.

“Our team has been communicating regularly with our clients and making calls proactively to ensure clients are well informed and comfortable with the overall management of their assets,” he said. “[Our clients] are grateful to have a comprehensive, diversified financial plan in place that they know has been stress-tested for times like these.”

“We encourage our members to continue to take advantage of the lower prices in their 401(K),” Cobalt Credit Union President and CEO Robin Larsen said. “Moving investments right now is not beneficial. History repeats itself, and the stock market will come back. Staying on target for your long-term goal is key. It is only a loss if you sell. Having a balanced portfolio, which includes a cash balance in positions, like savings or share certificate with immediate access, can alleviate the need to sell a position when the market has had a substantial decrease.”

Andrew Hunt, partner and co-founder of Hiley Hunt, said that the big surprise for some investors in this recent market pull-back is the extraordinarily bad year for bonds.

“Many investors assumed that when stocks fall, bonds will always move in the opposite direction — which of course, is not what has happened this year,” he said. “We’ve been helping clients understand that when purchasing bonds, yield is not necessarily the most important driver of investment selection. We must also measure risk premium for the associated return. In the environment leading up to 2022 it was important to select bonds and bond funds that had modest duration and high credit quality, even though that meant sacrificing current income. As we’ve seen it play out this first half of the year, long-duration and low credit quality bonds have experienced significant declines relative to the short-duration and high credit quality bonds.”

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While investment management is important, it’s only a tool to help investors achieve their goals, according to Hunt. Real impact is often driven through planning.

“We are spending the bulk of our time with activities like reviewing tax returns to help maximize tax planning opportunities, working together to make sure our clients’ estate plans are squared away, and updating our retirement readiness models for each client,” he said. “As a firm, we have made investments in hiring additional staff this year to bulk up our capacity to continue to go deep in the planning process for each of our clients.”

Improved Access

In March, Core Bank rolled out its RapidTRAC loan program, a client-centered digital lending system for businesses.

“We believe that [RapidTRAC] is a model that will allow all access to small business opportunities for people to get loans that they may not have had before,” Sorrell said.

Over the past few years Core Bank has focused on optimizing the digitalization of its product offerings. For instance, mortgage customers can now do a full application online.

“A significant component of our service model is the utilization of a client engagement roadmap, which details in a very transparent way all of the things that we do for our clients,” Harrison said. “The roadmap includes clearly defined dates of planning reviews and implementation, as well as our tactical moves toward value and tax harvesting that we have done on a client’s behalf. The roadmap considers both the historical and future perspective, showing our clients a very clear picture of their overall growth and strategy.”

In recent months the firm has seen greater interest in investment vehicles that seem to have been dormant for years.

“Given the decline in the bond markets, we have looked for investments that act as fixed-income alternatives,” Harrison said. “Additionally, the demand for inflation-protected investments has increased. Clients are more receptive to asset groups that have underperformed for a number of years, such as value stocks and commodities. It’s important to remember that all investments carry risk and there can be no guarantee of future success.”

Hoping to provide guidance and coaching before the member’s credit score or late payments are affected, Cobalt now has financial counselors on staff to assist its members with budgeting and finances. The credit union offers a bump-up CD rate that provides flexibility and gives its members the option to change their term on their certificates of deposits.

“Promoting financial literacy and educating our members is an important practice,” Larsen said. “When our members have a solid foundation of personal finance, they can make smarter financial decisions.”

Cobalt has expanded its current face-to-face interactive teller machines [ITMs] at several of its branch locations and will soon launch contactless debit cards. The credit union has implemented a debit-to-win-it contest for members to win $750 a month and has launched a summer personal loan sale, Lock & Shop, which is a 60-day lock with drop option for mortgages.

Inflation and Profits 

To minimize the impact of inflation, some of Core Bank’s customers pre-order inventory, which allows them to capture current pricing.

“We’ve also seen some businesses reassess their expansion plans or new lines of business until they understand where this market settles down and how bad it goes,” Sorrell said. “No one, including the folks in Washington, understand how deep of recession, or what type of recession, we’re going to have. It has to play out, but I think some businesses are trying to really invest in their people so they don’t have turnover.”

Harrison Financial has seen its small business clients and entrepreneurs implement a variety of tactics to help manage their profits, including locking in long-term borrowing costs, negotiating supply costs by locking in a price for a specified period of time with a guarantee of purchase — purchasing larger quantities of needed materials, increasing salaries to combat overtime and inflation, and re-evaluating business operations to be more productive and cost-efficient.

The majority of Hiley Hunt’s small business clients are feeling most of the inflation impact in rising wage expectations from staff.

“To accommodate these business needs and retain staff, businesses need to look at increasing the prices of their goods or services, for opportunities to reduce costs, and for non-monetary opportunities to keep employees engaged,” Hunt said. “It is tempting for small businesses to cut marketing spend or to reduce employee fringe benefits to preserve profit margins, but I have observed over the years that this is often the exact opposite of what is required to achieve both survival and growth in adverse economic environments.”

What We Can Expect

The next 12 to 24 months will be challenging for the financial industry, but the industry itself is healthy.

“Mortgage rates have been very good for doing business, [and it’s] the same with construction,” Sorrell said. “Lots of banks have saved up their earnings, putting it into their capital to position themselves for a potential downturn. The quality of loans are good. We’re well positioned to weather out this uncertainty as a whole. Interest rates will be a challenge for both consumers and banks, but we’ll work together. What we do is come up with alternatives or other products that maybe allow [customers] to do something on a shorter-term horizon that may be a better rate.”

Harrison said that the possibility of more “normal” interest rates is the biggest change that the financial industry is facing. With banks and other integrated financial companies having operated in an environment of depressed interest rates for some time now, and with the Federal Reserve squarely on a path to raising rates, there will be impacts on lending rates, interest-bearing savings accounts, and the valuation measures used for public stocks.

“There is likely to be some shakeout in the financial industry for those companies that might have taken on too much leverage and risk to their business, as we may experience a shallow recession in the coming year,” Harrison said.

Over the next year, Larsen expects to see a continued increase in auto lending with more cars being available on the market. Home equity loans will continue to increase because, with the ongoing housing shortage, people will decide to enhance their current homes.

“The unique intersection of technology, innovation, business model evolution and customer expectations contribute to digital transformation in the financial industry, but face-to face transactions still matter,” Larsen said. “When a member has trouble completing a digital transaction, they want immediate help, usually through live chat of video on a mobile device.”

“The stock market moves in cycles and based on historical data we have been due for a down period for quite some time now,” Hunt said. “For long-term investors this season could provide the opportunity to purchase investment assets at prices that are much more attractive than even just a few months ago. It may take several quarters to see the market rebound but over the long term I believe that investors will be rewarded for owning stocks.”

Investors also have opportunities to engage in tax-loss harvesting, which is a strategy to realize investment losses for the income tax benefits and immediately re-invest the proceeds in substantially different securities of the same asset class to maintain the former asset allocation.

“This allows the investor to participate in a future market rebound but have received the value of the tax loss,” Hunt said.