10 Steps Advisors Should Take to Protect Their Clients’ Portfolios Now

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1. Inflation may last longer than expected, so be cautious with bonds and stocks in clients’ portfolios.

High inflation is “likely to last longer than people expect” and the Federal Reserve waited too long to start raising the benchmark interest rate, according to Larry Swedroe, Buckingham chief research officer.

“That's at least a risk and that creates risk for stocks and bonds, and that’s why they’re both down sharply already,” he warned.

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2. Factor into financial planning that the Fed may increase the benchmark interest rate significantly higher.

Because the Fed waited too long to start raising the benchmark interest rate, it may also have to raise the rate significantly higher to get inflation under control, according to Swedroe.

“I would not be surprised — I put it at maybe a 25-30% chance — that we could see a fed funds rate as high as 5% or more,” he added.

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3. Prepare for a federal budget crunch that could weigh on stocks and bonds.

Unless aggressive actions are taken over the next few years, significantly more U.S. revenue will have to be devoted to Social Security and other entitlements, “leaving nothing for defense or investments, infrastructure or anything,” Swedroe warned.

“That's just not tenable,” he said. “That's why some people are so worried about the debt-to-GDP ratio. They're concerned we could end up looking like Japan which, for the last 30 years, has had very low if any economic growth" and a weak stock market.

Investors should consider addressing that risk through their portfolio construction such as by adding assets that don’t have that much exposure to stocks and bonds, he added.

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4. Investors may earn a ‘meaningfully positive return’ on fixed income.

“Shorter-term bonds have risen more than longer-term bonds,” according to Kevin Grogan, Buckingham managing director of investment strategy.

Meanwhile, the “value of the bonds that you already pulled is now lower,” he noted.

“But we would say that this is actually good news for the long-term because now you can actually earn a meaningfully positive return on fixed income on that portion of your portfolio,” he said.

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5. Don’t try to time the market.

“You never really know when things will be safe to invest,” according to Grogan.

For example, he said: “It never felt safe after 2008 to all of a sudden get back in the market if you got out. It always felt risky.”

It was the same thing if you just “think back to a couple of years ago [when] the market drew down sharply in February-March of 2020. And if you waited to get back in into the market until after we got to the good vaccine news in November of that year, you already missed a good bit of the recovery,” he said.

“The market always works in advance and in anticipation of what is about to happen,” he said. “And so in our mind, it's not a prudent strategy to try to time the market. You're best served sticking with your long-term strategy.”

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6. Make sure you are clear on what the client’s goals are.

The current state of the markets affects different investors in different ways, Jeffrey Levine, Buckingham chief planning officer, pointed out.

“For instance, if you're a young person just starting out saving today, the fact that … U.S. equities are down 20%, you love that, right? That's great. Because it means you're buying in at lower values. Of course, for so many of you who have saved so diligently over the course of your lifetimes and your careers, that's not good news for you.”

Therefore, he explained: “The first thing we need to do when we're talking about the impact on financial planning is figure out: What are your specific goals? What are your specific objectives? Where are you in your cycle?”

Even inflation impacts different investors in different ways, he noted. For example, if you rent an apartment, inflation “might impact you dramatically different than if you owned your home for the last 20 or 30 years,” he said.

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7. Review clients’ insurance policies.

It is “very critical” to review clients’ insurance policies, Levine said. “If inflation is high and costs are increasing faster than you expected them to, maybe, for instance, your life insurance is no longer going to be sufficient if something happens to you,” he said.

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8. You may need to increase the client’s long-term care coverage.

Similarly, “if it costs more, if something happens to you, you may need more dollars in order to pay for those expenses,” Levine said.

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9. Figure out if clients should sell their homes now or wait.

“Many people are looking at whether they should sell their homes because prices are high,” Levine went on to say. “Should they look to wait because interest rates have started to rise?”

Levine pointed to a recent Wall Street Journal article that said the housing supply is still short. “If you are holding off on buying your home today because you say, well, rates are higher than they were, look what interest rates have done over the last six months.”

He warned: “There's no guarantee that in six months from now, they're not going to be even higher than they are today. And there's no guarantee that prices in the housing market are going to compress. Yes, we've seen incredible growth over the last few years but housing supply still remains relatively tight.”

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10. Consider some estate planning.

“The final item I would note here is how this may play out for those individuals who are lucky enough to potentially have estate tax concerns either at a federal level or even at a state level, or perhaps have concerns that one day the federal government may lower its exemption from where it is today,” Levine said.

“That may trigger some concerns,” he said. “Many of the advanced planning techniques that we utilize with clients are keyed somehow to the interest rate and, as interest rates rise, many of those techniques become less favorable.”

He added: “Now is a great time if estate tax is a concern for you to perhaps take a second look at whether doing some estate planning today that you would've otherwise put off. This could be an optimal time to do it.”

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1. Inflation may last longer than expected, so be cautious with bonds and stocks in clients’ portfolios.

2. Factor into financial planning that the Fed may increase the benchmark interest rate significantly higher.

3. Prepare for a federal budget crunch that could weigh on stocks and bonds.

4. Investors may earn a ‘meaningfully positive return’ on fixed income.

5. Don’t try to time the market.

6. Make sure you are clear on what the client’s goals are.

7. Review clients’ insurance policies.

8. You may need to increase the client’s long-term care coverage.

9. Figure out if clients should sell their homes now or wait.

10. Consider some estate planning.

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10 Steps Advisors Should Take to Protect Their Clients’ Portfolios Now

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Related: How 11 Advisors Are Shifting Portfolios Now (or Not): Advisors’ Advice

More on this topic

1. Inflation may last longer than expected, so be cautious with bonds and stocks in clients’ portfolios.

2. Factor into financial planning that the Fed may increase the benchmark interest rate significantly higher.

3. Prepare for a federal budget crunch that could weigh on stocks and bonds.

4. Investors may earn a ‘meaningfully positive return’ on fixed income.

5. Don’t try to time the market.

6. Make sure you are clear on what the client’s goals are.

7. Review clients’ insurance policies.

8. You may need to increase the client’s long-term care coverage.

9. Figure out if clients should sell their homes now or wait.

10. Consider some estate planning.

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