PROTECTING YOUR PORTFOLIO

I have received many questions about investment strategies for the rest of 2022. It’s no secret that the values of many equities, as well as bonds, have fallen significantly since the beginning of the year.

Investors want to know if they should be selling some of their equity and bond holdings, or should they be investing more because there is a high probability that equity prices and bond prices will start increasing in value in the near future?

It is unlikely that inflation will quickly return to much lower levels anytime soon. Also, it is unlikely that the war in Ukraine will end quickly, resulting in lower energy costs. Even though equity prices have fallen, many experts believe that the value of equities are still too high and can fall further. The bottom line is that no one can predict with certainty when equity and bond values will start recovering in value, and whether it makes sense to start buying more equities and bond investments now.

It is likely that the Federal Reserve will continue to increase short-term interest rates in 2022 in order to keep inflation under control. In the short run, as interest rates increase, the value of long-term bonds will continue to decrease. So, if you want to protect the value of your current holding of bond mutual funds and exchange traded funds, you could switch your bond holdings to shorter maturities and hold off on new investments in bond holdings with long maturities. In my own portfolio, I have switched from long-term holdings to shorter maturities. In the long run, higher interest rates will provide more income for bond holdings with long maturities, but in the short run, increases in interest rates will decrease the value of bond investments with long maturities.

Even experts cannot predict when equity prices will stop falling. In the long run, equity prices have, on average, increased more than the inflation rate. For investors who have assets or income sources to invest on a long-term basis, investment in equities makes sense.

However, it is prudent to use “dollar cost averaging” — investing a fixed amount each month rather than investing a large amount at one time. Equity prices may not have reached the bottom; many experts expect that these values will continue to fall in the short run.

Personally, I continue to use dollar cost averaging into mutual funds/ETFs. I believe they will increase in value in the long run. Even if the equities fall in value in the short run, I will be investing at lower prices.

Some investments benefit from inflation, because their interest rates are adjusted based on inflation. For months, I have written about Series I bonds issued by the U.S. Treasury. The return on these bonds changes each six months. These bonds earn two types of interest. First, there’s a fixed rate of interest for the life of the bond. But there is also a rate of interest that changes every six months based on the non-seasonally adjusted consumer price index for all urban consumers (CPI-U).

The advantage of investing in these bonds is that you can never lose the principal amount you invest, regardless of what happens to the Consumer Price Index or interest rates.

Compare this to investments in longterm bond funds/ETFs. The value of these investments has fallen dramatically because interest rates increased.

As I have said previously, you can only invest $10,000 per year in I bonds ($20,000 for a joint return). But it is a long-term investment. You have to invest for at least a year, and if you sell before five years, you lose three months interest. See the U.S. Treasury website, TreasuryDirect.gov, for more information.

Elliot Raphaelson welcomes questions and comments at raphelliot@gmail.com.

DREAMSTIME A trader works on the floor during a steep dip of the New York Stock Exchange on May 18 in New York.