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With supply chains strained, the COVID-19 pandemic still gripping the nation and inflation looming, investors may be nervous about their portfolios and wondering what actions they should take.

Some investors may want to adjust their holdings, but investment professionals urge most investors to consider the long haul and stick to their plans.

“Instead of trying to time the market, we try to have clients invested at their appropriate risk level for their appropriate time frame,” Capstone Investment Financial Group Financial Advisor Ryan Turbyfill said.

Bear and bull markets are cyclical, said Ellis “Bud” Rainsberger, president of Rainsberger Wealth Advisors.

“We know that it’s going to happen, so we don’t have to feel like we have to sell because the market’s down for a couple of days, or a couple months, or even a year,” Rainsberger said. “Markets recover, and knee-jerk reactions typically don’t work well.”

Investors’ individual objectives and goals and a plan to achieve those goals are the guideposts for investment decisions, said Brian Colvert, president and CEO of Bonfire Financial.

“There’s a lot going on with the economy, and we have a lot going on politically as well,” Colvert said. “But in the grand scheme of things, I don’t think that changes the fundamentals of investing.”

That said, investment advisers are tracking changes in the factors that influence markets day to day and over a longer term.

RISING INTEREST RATES

Interest rates are a major factor impacting investment strategy, Turbyfill said. 

“On the fixed income side, we try to make sure we’re positioned for higher interest rates by not having really long-duration bonds that mature in six- or seven-plus years,” he said. “Those are going to get clobbered in a rising interest rate. On the equity side, we saw in March that hyper-growth companies that are very highly leveraged where a big portion of the cost is debt, they really get hit when interest rates creep up.

“So I think investors need to be really careful of any kind of hyper-growth or speculative stocks.”

Those could include new companies that have prospered during the pandemic, including payment processing firms and food delivery businesses. Some of those are good investments, but investing in them is risky because of volatility and their short track records.

“It takes 99 companies to close their doors to get the one Amazon,” Turbyfill said.

Supply chain issues have been affecting semiconductor stocks and are likely to affect retail stocks at Christmastime, he said, “but the demand is there. It’s just an interesting environment. Near term, that’s definitely something that’s going to have to be worked through.”

It’s difficult for many companies to keep up during inflationary times, he said.

“We’re looking at the blue-chip types of companies that are going to be around, companies that are going to be able to pass cost increases on to consumers, as well as companies that don’t necessarily have significant input costs,” he said.

The ones that will best be able to deal with supply chain issues are “quality companies that are high on the supply chain list of suppliers because they’re solid, large buyers of goods,” he said.

Turbyfill said he tells investors not to be afraid to take some profits from big-growth stocks and add value companies.

Real estate investments can benefit clients looking for income. They typically do well in an inflationary environment, but it’s important to be picky, he said, because many real estate companies are very highly leveraged.

Social impact investing remains popular, Turbyfill said, but some new companies are losing money trying to be the first in their space — for example, electric vehicle charging stations.

“There is risk,” he said, “but some will be the ones that make it.”

HEDGING INFLATION

Rainsberger doesn’t think the inflationary trend is transitory, and believes people will have to adjust to what amounts to a hidden tax.

“But I don’t think it’s a forever kind of thing, and I think if we can get supply chain issues worked out and come to an equitable workforce that’s being compensated correctly, those things will mitigate and smooth out over time,” he said.

Investors do need to keep an eye on holdings that might be negatively impacted by inflation as well as those that tend to do well, he said.

“On the edge, you might trim something back or add something that could add a little value, but overall, good-quality companies have learned how to deal with these, and they still merit a place in the portfolio.”

Rainsberger said his firm has a consulting practice that focuses on helping corporate clients manage their retirement plans, and also works with a couple of foundations and nonprofits.

The company provides a broad menu of investment options, helps administer retirement plans and makes sure corporate clients fulfill their fiduciary duties regarding investments.

The firm helps answer questions such as whether the client should be contributing to the retirement plan for the benefit of its employees, and offers basic investment education to participants so they have information about how markets work and the tools and resources to make good decisions

“We work with a couple of major platform providers to come up with a solution that meets the particular client’s needs,” Rainsberger said.

As far as the actual investments corporate clients make, “the same principles apply — investing for the long term and making perhaps slight changes as you go along,” he said.

He tells clients that are focused on the short term that “investing is like a competitive marathon, not the 100-yard dash. It is a multiple-year cycle and not necessarily the short-term volatility of the market.” 

TWEAKING PORTFOLIOS

Colvert sees business owners with a variety of objectives and goals, depending on their ages and whether they are just starting out or looking to exit.

While he hasn’t seen a huge wave of new younger investors, “I see a lot of younger people wanting to learn and be educated. They are seeing the need to stay informed and to understand how it all works.”

Colvert agrees that the best investment strategy is to design a plan around the investor’s specific needs and objective and adhere to the plan, but his company is looking at possible portfolio adjustments as inflation takes hold.

“Individuals who have high fixed-income portfolios or who are more conservative are the ones who are going to need to probably be more nimble in the coming months or years,” he said.

If inflation spurs the Federal Reserve to start increasing interest rates, “if you’re heavily invested in bonds, those bond values can come down,” Colvert said. “The hard part is that right now most bonds don’t really produce quite a bit of yield, so seeing interest rates go up, it could be that your fixed income is negative.”

Alternatives to traditional fixed income products could supplement a traditional portfolio in that event, he said. They include floating rate instruments with interest payments that fluctuate with the underlying interest rate. 

Another alternative that might be worth a look in the future is a laddered portfolio that contains fixed income securities with different maturity dates.

“I probably wouldn’t be recommending that currently, just because the rates are so terrible,” Colvert said.

Companies that seek financing for projects such as a new plant or a new product might not be able to get all of the funding they need through banks, he said.

“Banks have lending standards that they have to abide by, and there’s only so much that they can lend out,” he said. Companies that fall short of their needs may go to the private market, which has been gaining momentum in the past 12-18 months.

“The private market will charge them more — normally on a spread above LIBOR [the London Interbank Offered Rate, a benchmark interest rate at which global banks lend to one another],” Colvert said. “As interest rates increase, the loan payments that they owe the investors increase as well — kind of like an adjustable rate mortgage.”

Speculative investments like cryptocurrency also have been gaining in popularity, but investors who want to explore such investments need to be sure they understand how much risk they carry, Colvert said.

“It can go boom or bust very easily,” he said, “and I don’t think we know which way it’s going to go yet.”

While he thinks that blockchain, the backbone of cryptocurrency trading, is here to stay and has many advantages, “quite a few of us — and I’ll put myself in there — are still learning and trying to understand this very complicated new industry.”

It remains to be seen how the thousands of cryptocurrencies work together and how the government is going to regulate the industry, he said. 

“I definitely think it’s still very speculative at this point,” he said. “We don’t have it in any of our portfolios.”

Gold is still a good investment “if it’s done right,” Colvert said. “If you want to own gold, you need to own it outright, not through a derivative or through futures. That is more speculative.”

Commodities in general “are all good investments, but as a firm, it’s not something we are particularly advising people into, currently. But it’s not a bad diversification to any portfolio.”

Taxes are always a big issue for business owners, and it’s important to understand their interplay with investments, he said.

There are tools to defer taxes, but changes are being considered in Congress and by the Biden administration.

One recent proposal focused on IRAs and Roth IRAs, Colvert said.

“For high-income earners, one of the tools you could use was a backdoor Roth or super backdoor Roth IRA,” he said. These allow investors to put extra funds into a Roth IRA above the income limits of $208,000 for married couples filing jointly or $140,000 for single filers.

“They’re wanting to eliminate that tool,” he said. Another proposal would eliminate the ability to hold real estate in IRAs.

“None of that is law yet,” Colvert said. “But we will see what happens.”

Note: The information in this article should not be construed as investment advice. Investors should always consult with an investment professional about their individual situation.

Reporter

Jeanne Davant is a graduate of the University of North Carolina. She worked for daily newspapers in D.C., North Carolina and Colorado, and has taught journalism and creative writing. She joined the Business Journal in 2017.