The stock market got off to a rocky start in 2022 as rising interest rates turned investors bearish and the Federal Reserve scaled back stimulus. The S&P 500 index is down more than 10 percent from recent highs, and bonds are down too. With this volatile start and the prospect of higher interest rates later this year, how should investors proceed?
In a new Bankrate survey, a group of investment professionals revealed where they would recommend clients to invest in 2022 to keep growing their wealth. We asked Market Mavens Q1 survey participants, “Where or how would you advise a typical client to invest $10,000 right now?”
Their responses revolved around a few key issues, specifically how to avoid being overwhelmed by rising interest rates and falling bonds. Not surprisingly, cryptocurrencies weren’t mentioned, as our Q4 survey found that many experts felt far too risky to invest in.
Forecasts and Analysis:
This article is one of a series of articles discussing Bankrate’s first quarter Market Mavens survey results:
How to invest $10,000 in 2022
Market watchers on the survey pointed to a range of strategies for thriving in 2022, with many investors alerting to the dangers of rising interest rates as the Federal Reserve ramps up efforts to combat rising inflation.
1. Keep a balanced portfolio
Markets are expected to see significant volatility this year as the Fed hikes interest rates and reduces other monetary stimulus to the financial system. Some respondents emphasized the importance of building a balanced investment portfolio that can withstand volatility.
Dec Mullarkey, managing director of SLC Management, suggests investors with $10,000 invest 60 percent in U.S. stocks and 40 percent in shorter-dated U.S. Treasuries with maturities of two to five years.
“By holding debt securities with shorter maturities compared to longer maturities, investors are less vulnerable to rising interest rates, and because these bonds mature quickly, investors can reinvest longer when higher interest rates materialize,” he says.
Brian Price, head of investment management at the Commonwealth Financial Network, points to the benefits of diversification and specifically warns about investments that have been hot lately.
“I think it’s important to focus on a diversified portfolio and not invest too much in sectors or themes that have outperformed significantly recently,” he says. He points to the danger that investors refer to as “mean reversion,” which is the tendency for hot assets to underperform after a period of outperforming and ultimately converge towards their long-term average return.
“Mean reversion is one of the most powerful forces in portfolio management, and I think it pays to be a thoughtful contrarian when investing,” says Price.
One analyst recommended an even more defensive approach given what he believed to be the risks.
“I would invest 30 percent in tech growth stocks, 30 percent in the broad index, 10 percent in metals, and 30 percent in cash until the S&P 500 makes a 20 percent correction,” said James Iuorio, managing director, TJM Institutional Services.
2. Stick to the blue chips
High-quality stocks — the so-called “blue chips” — are often a haven in the storm because they’re backed by strong companies that will continue to thrive over time. Blue chips include stocks like Amazon, Apple, and JPMorgan Chase.
Sam Stovall, Chief Investment Strategist, CFRA Research, suggests that investors invest their money in “high-quality blue chips that offer increasingly attractive yields.”
Many investors appreciate the income that dividend stocks produce, and the dividend offers some yield, even though the market can be volatile.
Clark A. Kendall, president and CEO of Kendall Capital Management, also thinks mid-cap and large-cap value stocks are the place to be. He recommends a strategy called “Dogs of the Dow,” which advocates investing in the highest dividend yields in the Dow Jones Industrial Average. The Dogs of the Dow strategy would invest in large cap value stocks.
“Dogs of the Dow are a great opportunity to own nice dividend-paying stocks that will be able to grow earnings, profits, and dividends in the future as a hedge against inflation,” he says.
3. US financials seem like a great option
US stocks are a perennial favorite due to the strong domestic business climate and generally robust growth that many see at least over time. But even in this group, US financials could be a particularly good choice to grow as interest rates rise.
Jeffrey Buchbinder, equity strategist at LPL Financial, says, “We would be overweight US equities, well diversified across market caps and styles with overweight financials and real estate.”
Financial stocks like banks tend to do well when interest rates are spiking. Other investors might stick with ETFs, which will do well as interest rates rise.
Buchbinder warns against investing too much in bonds that are very sensitive to rising interest rates, such as longer-dated bonds.
4. Look for inflation-linked bonds
Those surveyed were particularly nervous about bonds because of the dangers of rising interest rates. That’s because bond prices fall when prevailing interest rates rise. This effect is most pronounced for longer-dated bonds, which can fall significantly when interest rates rise. In contrast, short-term bonds are less affected, and very short-term bonds may feel almost no impact.
“Long-dated US Treasuries and corporate bonds are the financial landmines of today’s market that investors need to stay away from,” said Kendall.
Mullarkey notes that “5-year government bond yields are very close to 10-year yields, which provides little incentive to hold longer-dated debt.”
However, if you need exposure to bonds, bonds that adjust for inflation can be an option. One popular option is called TIPS, or Treasury Inflation-Protected Securities. These US Treasuries are indexed to inflation and help protect investors.
Here’s what Joseph Kalish, chief global macro strategist at Ned Davis Research, recommends for investors: “TIPS for inflation protection and better yields than low-yielding nominal Treasuries.”
Another option for protection against inflation could be Series I savings bonds, where the payout is adjusted every six months depending on the rate of inflation. However, you are limited to an investment of just $10,000 per calendar year and you must own the bonds for at least a year.
5. Value stocks can be an attractive choice
Value stocks were repeatedly cited as an attractive option by survey respondents. Value stocks tend to do well during periods of rising interest rates, while many investors are exiting growth or momentum stocks, pushing the latter group down.
Kenneth Chavis IV, CFP, Senior Wealth Manager, LourdMurray emphasizes that the right portfolio depends on the client’s “goals, timeframe and comfort with volatility”.
He suggests investors “invest globally with a bias towards value stocks.”
Value stocks have been a popular pick for our investment professionals in recent Market Mavens quarterly surveys.
When investing in individual stocks, it’s important to remember that stocks can be cheap for good reasons, such as: B. the possibility that their business will be permanently impaired. So you need to analyze them carefully before buying. However, you can buy a value stock ETF and harness the power of diversification to reduce your risk and the time you spend analyzing stocks.
Bankrate’s survey of stock market professionals for the first quarter of 2022 was conducted March 1-10 via an online survey. Survey requests were emailed to potential respondents across the country, and responses were voluntarily submitted through a website. Respondents were: Dec Mullarkey, Managing Director, SLC Management; Brad McMillan, Chief Investment Officer, Commonwealth Financial Network; Brian Price, Head of Investment Management, Commonwealth Financial Network; Jim Osman, Chief Vision Officer, The Edge Group; Sean Bandazian, Principal Analyst, Cornerstone Wealth; Patrick J. O’Hare, senior market analyst, Briefing.com; Chris Zaccarelli, Chief Investment Officer, Independent Advisor Alliance; Jeffrey Buchbinder, Equity Strategist, LPL Financial; James Iuorio, Managing Director, TJM Institutional Services; Robert A. Brusca, Chief Economist, FAO Economics; Joseph Kalish, senior global macro strategist, Ned Davis Research; Sam Stovall, chief investment strategist, CFRA Research; Chuck Carlson, CFA, CEO, Horizon Investment Services; Clark A. Kendall, President and CEO, Kendall Capital Management; Kenneth Chavis IV, CFP, Senior Investment Manager, LourdMurray; Kim Forrest, Chief Investment Officer/Founder, Bokeh Capital Partners.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. In addition, investors are advised that past performance of the investment product is no guarantee of future price increases.