There is no doubt we are in unusual times, but the basic formula for long-term success hasn’t changed much and is within your control.

In general, there are three primary ingredients to long-term success in the financial markets: diversification, balance, and your attitude or outlook on markets. Making good decisions regarding the first two ingredients is fairly straightforward. It����ap the third ingredient that usually causes investors problems.

Let����ap start with diversification and balance because they are easier to implement. In a nutshell, it����ap prudent for investors to be fundamentally diversified and balanced. If you’ve done that, you’ve probably done about 90% of what you can do to intelligently manage your money. Diversification and balance are the foundations for a sound portfolio.

These days it����ap fairly easy to diversify in both the stock and bond markets. There are numerous index funds designed to track broad-based indices like the S&P 500 for stocks and the U.S. aggregate bond market for bonds. Creating a balance then requires you to decide how much you want in each market.

The appropriate mix of stocks (risk assets) vs. bonds (more stable assets) depends on where each investor is in their financial life and their individual tolerance for risk. The basic point, however, is to consider balancing your investments between riskier investments like stocks and more stable investments like bonds.

Now here comes the hard part. If you were balanced and diversified last year, you probably didn’t have a great year. Investors who followed the fundamentals of what constitutes a prudent portfolio may have seen their portfolios decline by 15% to 20%, depending on how they were allocated.

This is where the third ingredient comes into play. Your attitude and outlook on markets will determine how you respond to this. When investors experience meaningful declines, they often get nervous about the future. They think, what if markets keep going down? What if they don’t recover? Those are all normal concerns, but how you manage those risks will have a big impact on your long-term success.

A key to managing risk in financial markets is to stack the odds of good outcomes in your favor. You do that by being fundamentally diversified and balanced; then, you stick with those decisions through difficult markets. It����ap tough to stand by those decisions if you don’t have the right attitude and outlook on markets.

The appropriate attitude or outlook on markets means you need faith in the resiliency of markets. No one can prove that they will recover, and there are no guarantees. Thus, if you don’t have that confidence or faith, you’re likely to buckle when markets swoon. That often leads to selling low and buying back when prices are higher.

But how do you have confidence when things seem like they are falling apart?

The answer is time. Viewing market returns through an appropriate time period is key. If you analyze success over short-term time periods, you are likely to be disappointed.

For instance, over the last five years, the stock market produced a total return of about 50%, even after 2022’s decline. You can choose to focus on the almost 20% decline (as of the time I wrote this column) last year, or the 50% return over the previous five years. On the one hand, it was a bad year. On the other, it was a good five years.

I recently listened to an interview Warren Buffett gave in early 2022. It was over an hour long, and he got several questions about what makes a successful investor. He repeated the same answer he’s given over the decades. He said that to be a successful investor, you need the right outlook on markets. He didn’t say the most important thing is to be great at math, great at understanding company financials, or great at figuring out the economy. He said the most important characteristic of successful investors is to have the right attitude and outlook about markets. That means accepting the volatile nature of markets, which can be severe at times. And accepting the reality of the time horizon generally needed to build wealth: think decades, not days.

If you expect more than the markets can provide in terms of stability and returns over the short term, you are likely to make poor decisions over the long term. You may find this helpful to keep in mind as 2023 might again test your faith in markets.

Charlie Farrell is a partner and managing director at Beacon Pointe Advisors LLC. The information contained in this article is for general informational purposes only. ����aps referenced are as of the publication date and may be modified because of changes in the market or economic conditions and may not necessarily come to pass. All investments involve risks, including the loss of principal.

Higher volatility in the bond market is a challenge for investors because, in general, investors rely on bonds for defense. Usually, bonds are fairly stable and often go up in value when the stock market goes down. Thus, they offer good diversification benefits. For instance, in 2008 and 2009, bonds provided positive returns to help offset stock declines during the great financial crisis. The bond market also went up in 2020 when the COVID crisis sent stocks down about 35%. But this year, bonds went down while stocks went down. What happened?

It’s all about interest rates and decisions by the Federal Reserve. In 2008, the Fed lowered interest rates to help spur economic activity. In 2020, they did the same thing. And when the Fed lowers interest rates, they make bonds that investors hold with higher interest rates more valuable. Thus, the price of the bonds already in the market tends to go up. But this year, the Fed did the opposite. Not only did they raise rates, but they increased them at one of the fastest paces in history. The rapid increase in rates pushed down the value of bonds already in the market. The change in interest rates has been so dramatic that it created one of the largest price declines in bond market history.

Does this mean that bonds might not provide much defense or help offset stock declines in the future? In finance, there are unusual events that fall outside the expected functioning of markets. 2022 was one of those years for bonds. If you figure this may be the worst decline for bonds in about 100 years, then this type of decline had roughly a 1% chance of occurring. That����ap pretty small, but every so often, investors live the 1% event. It’s part of the risk of investing.

When evaluating portfolio strategies or asset class returns, investors should evaluate them over many different timeframes, not solely based on an outlier year. Lots of things can happen in a short period of time that are not indicative of what may happen over a longer cycle. And investing is about longer cycles, such as 10-, 15-, and 20-year cycles. For instance, the stock market can go down in shorter-term cycles all the time, but over the long term, it generally goes up as the economy grows.

So, when assessing bonds and the role they can play in portfolios, it����ap helpful to think in multi-year cycles. Generally, higher-quality bonds provide a fair amount of defense and a steady stream of income payments to help manage risk in portfolios. It����ap reasonable to expect they’ll generally do that going forward, but not every year or every time the stock market falls.

It����ap also important to remember the income production. While bond prices may move around, as long as the issuer of the bond is financially healthy, investors should still receive their interest payments. The good news going forward is that the bond market provides more income than it did a year ago. If bond investors just sit back and collect the interest payments, those payments should help mitigate the declines in bond prices this year. Finally, if the Fed eventually gets control of inflation and lowers rates in the future, bond investors may again benefit from a price increase.

In general, investing in bonds is about collecting the interest payments and having some defensive holdings in your portfolio. It����ap unusual for the Fed to make such drastic rate moves, but there could be more on the horizon until inflation is under control. After that, hopefully, we can look forward to some old-fashioned boring bond returns.

Charlie Farrell is a partner and managing director at Beacon Pointe Advisors LLC. The information contained in this article is for general informational purposes only. ����aps referenced are as of the publication date and may be modified because of changes in the market or economic conditions and may not necessarily come to pass. All investments involve risks, including the loss of principal.

All we can really do is look at history to see how markets have done in the past. That will give us a rough estimate of what we might experience in the future. And of course, markets can exceed whatever parameters they set in the past. It����ap not as if the past shows the limits of market volatility, just the rough range of what you might reasonably expect. It can always be better or worse than that.

These days, when I hear economists and market strategists talk about the “long term,” they often discuss it in terms of either several months or a few years. You might hear someone say, “six to 12 months from now the market should bottom,” or “within a year or two, markets should recover.” And because we mostly hear economists and strategists talk in these timeframes, many investors likely think that a potential recovery cycle will happen sometime between six months from now to a couple of years. Again, that����ap reasonable because that����ap when most recovery cycles do occur. But the long term can be longer than that, and you should know the numbers.

In the U.S., we have had a number of difficult market cycles where stocks took more than a few months to a few years to recover. Since 1926, we’ve had 12 calendar year cycles where stocks had a negative total return for five years. We’ve also had four calendar year cycles where stocks had negative total returns for 10 years. One of those cycles ended in 2009, so it����ap not ancient history.

We also have examples of other developed stock markets that have stagnated for longer periods. The classic example is Japan. Its stock market peaked in the late 1980s and hasn’t seen those peak values since then. In Europe, they have a stock index called the Stoxx 600, which is similar to our S&P 500. Since the year 2000, it����ap had less than a 1% annualized price return.

These are modern stock markets that have sophisticated investors and sophisticated regulators overseeing them. But their economies and markets got stuck in a cycle of low productivity, low growth, and excessive central banker and government intervention. Despite everyone’s good intentions, things haven’t worked very well.

I have no idea if we’ll go down this type of path in the U.S., but there are factors converging that make something like a long stagnation more likely. Consider that from 2000 through 2019, the total annualized return from U.S. stocks was just a little more than 6%. That����ap one of the weakest 20-year cycles in history. And it came after 12 years of massive support from the Federal Reserve that many believe served to pump up financial market values. If you remove that support, the future looks a lot more uncertain.

When markets get into a stagnation funk, they usually don’t go down and stay there. Often, the cycles have been comprised of big rallies and declines, but when you net it all out, things didn’t move much. By the time you realize that what you experienced was a longer stagnation, there likely isn’t much you can do about it.

Why am I bringing this up? It����ap to keep you grounded in the realities of markets. They aren’t always there to bail you out. So, what can you do about it? The number one thing is to keep your financial house in order. Live squarely within your means, don’t carry credit card debt, pay off your long-term liabilities like your house and auto loans, and save a healthy amount of your salary every year, somewhere in the 12% to 15% range.

I know many people think it����ap not possible given the cost of housing, autos, and education, the list goes on and on. There’s no doubt that there are many challenges and barriers to saving out there, but you can make choices. For instance, you can choose where to live, and today employees have more flexibility than ever. The median home price in Kansas City is about $240,000; in San Diego, it����ap $860,000. Nice weather is expensive.

When you are younger and building your finances, it����ap important to set yourself on a sustainable path. If you get off course and don’t realize it until you’re 55, it����ap hard to fix. There just isn’t enough time. Markets aren’t always there when you need them to boost the value of your home or your 401(k) by large amounts. In some cycles, you have to do most of the heavy lifting. Just something to think about as investors anticipate the next Fed bailout and bull market run.

Charlie Farrell is a partner and managing director at Beacon Pointe Advisors LLC. The information contained in this article is for general informational purposes only. ����aps referenced are as of the publication date and may be modified because of changes in the market or economic conditions and may not necessarily come to pass. All investments involve risks, including the loss of principal.

“Right now we have everything moving negative — stocks, bonds and real estate,” said Charlie Farrell, managing director of the Denver office of Beacon Pointe Advisors.

Stock market corrections, defined as declines of 10% or more, and bear markets, down 20% or more, are fairly regular occurrences. What sets this market apart is that the most common hedge retirement plans use to offset those stock declines — bonds — are suffering historic losses because of rapidly rising interest rates.

Stocks are mostly in bear market territory. The Barclays Aggregate Bond Index, a measure of fixed-income performance, is down 16% this year, said Scott Bills, CEO of Nilsine Partners, a wealth management firm in Greenwood Village.

“The bond market is on track to have its worse year in history by five times,” Bills said. The asset class used to buffer against stock market losses is performing almost as badly as stocks, which is unheard of. The safe haven against the storm is swamped.

What that means is people who are now entering retirement may have a lot less money than expected, and a lot less than they need to meet the goals they had originally set.

A rule of thumb in retirement planning is to not spend more than 4% of a portfolio’s original value each year. In a completely flat market, with no gains or no losses, that would last someone 25 years, Farrell said. Earn a couple of percentage points above inflation, which isn’t too hard to do in most years, and that nest egg can outlast most retirees.

But Michael Finke, professor of wealth management at The American College of Financial Services, argues that in today’s environment, 4% is too aggressive, and even 3% may be too aggressive.

To bolster that argument, Finke, who was in Denver earlier this month speaking at the National Association of Personal Financial Advisors, presented the chances of failure on a conservative portfolio that is 60% bonds and 40% stocks earning typical returns of 4% on bonds and 8% on stocks a year and with a 1% management fee. He assumed a 3% withdrawal rate, which is $30,000 a year on a portfolio of $1 million.

If someone retires in a 30% down year for stocks, that person would only have around a 50-50 chance of not running out of money in retirement. If the market is down 20%, which is where things are at with two months to go in the year, then the odds of having the money last long enough are closer to 7 in 10. For those who start out with a moderate 10% decline in stocks, the failure rate is just under 16%.

Those probabilities are based on something known as a Monte Carlo simulation, which assumes different outcomes based on different scenarios. One way to think of it is sitting at a poker table where everyone is dealt a different set of cards. Some hands are going to be winners and some losers from the get-go. Anyone retiring right now has been dealt a very ugly hand.

Spend cash savings

One key way to avoid taking a hit in a down market is to not sell assets and wait for the rebound — don’t lock in losses. Bear market or not, Bills recommends his clients have 18 to 24 months of living expenses set aside in a liquid emergency fund, one that isn’t linked to volatile investments.

“It sits there no matter what your allocation is, and it keeps you from having to sell,” he said.

Charlie Dunn, CEO of Intergy Private Wealth in Colorado Springs, takes it even further. He recommends having five years of spending sources in “safe buckets” that don’t require selling off assets. Beyond an emergency fund, those buckets would include income streams from things like interest payments, dividends, and rents on real estate investments.

“Five years would have gotten you through every correction we have seen other than the Great Depression,” he said.

But Farrell and others caution against going too heavily into cash after the fact or trying to time the market. With inflation running at 40-year highs, holding a significant portion of retirement savings in cash year after year isn’t a winning strategy, at least in terms of keeping up with rising costs. It remains a balancing act.

“The equity market has been the place to grow your assets and outperform inflation long term,” added Joanna Heckman, a vice president and financial consultant with Charles Schwab in Denver.

Work longer

Bear markets are typically associated with a recession, and recessions are usually associated with job losses, the kind that can push older and higher-paid workers into retirement sooner than expected. But so far, this downturn is playing out much differently. Colorado’s unemployment rate remains a historically low 3.4%.

Employers remain short of help, and while that could change in the months ahead, a paycheck remains one of the surest ways to generate an income and avoid drawing down savings. For those who can do it, one of the best ways to boost the long-term odds in retirement may be to not retire.

Bills said he had a conversation with a client Tuesday who decided he still enjoyed doing what he does and was going to wait another year to quit his job while the economy sorted itself out.

“Whether you are in a bear market or not, if you have the ability to continue making income and can delay that retirement, consider it,” Bills said.

Farrell adds it doesn’t necessarily mean staying on full-time. Going part-time can lower the amount of retirement savings needed, while also allowing someone to ease into a reduced workload. Anything that provides income and takes the pressure off the retirement portfolio is beneficial.

Trim spending

The last thing people who have scrimped for years so they had money to retire may want to hear is that they need to cut back on spending, but that represents a third way to tackle the new retirement reality.

“Continuing to work is a very personal decision,” Heckman said. “Some people would rather pare back their spending.”

Celebrating retirement with a big splurge is somewhat common. It could range from buying a recreational vehicle to taking a dream trip abroad. But the current environment is one where it pays to delay. Not eliminate, just delay.

So much is out of the control of investors, Heckman said. They can’t control Federal Reserve policy or supply-chain bottlenecks that drive up inflation or how stocks will perform. But personal spending is one area where they have some say.

“Where are areas you can decrease your spending when markets are tough? How can you avoid making large withdrawals?” she said. The delayed gratification that allows for the accumulation of retirement savings can also help recent retirees weather the current downturn and put them in a better position for long-term success.

Farrell said there is so much uncertainty right now. The Federal Reserve may let up on interest rates too soon and the economy could see rolling waves of sustained inflation lasting for years. The last time that happened was in the 1970s and stock market returns went nowhere for over a decade. Or the Fed may keep the brakes on for too long, triggering a severe recession and even steeper correction in both bonds and stocks.

“In this period, you have to decide the amount of risk you want to take with the uncertainty that is building,” he said. “Know yourself as you go through this cycle. Put yourself in a place to deal with uncertainty.”

While the returns have been ugly this year (negative 22% for stocks as of the time I’m writing this column), we aren’t even in serious bear market territory yet. The average decline in the stock market during a bear market is about 35%.  That����ap the average, which means half of the declines are worse than that. For instance, in the financial crisis of 2008, the market declined about 57%, and in the tech crash of 2000, about 50%. If you are feeling uncomfortable now, you should consider training your brain for bigger potential declines.

The reason you need to train your brain is because this is primarily a psychological game. If you can look beyond the declines to an eventual recovery, you can maintain your commitment through the cycle. But getting there is tough as you watch your hard-earned savings shrink.

Just like an airline pilot trains in a simulator for emergencies, you have to train yourself to handle difficult market conditions. We know that for most people, declines feel twice as bad as gains feel good. Thus, you can experience a lot of mental distress if markets fall hard. If you don’t prepare, then you are likely to make poor decisions at the wrong time.

Now, there are no guarantees of a market recovery, but there are no guarantees in just about anything in life. The financial markets present you with a range of potential outcomes, and you should consider positioning yourself for the more likely longer-term outcomes. The odds of the stock market recovering within, say, three to five years are quite high. Historically, markets have recovered, so it����ap reasonable to assume they will again. Thus, you need a basic confidence that the system bends but doesn’t break. If you don’t have that confidence, then the field of finance doesn’t have much of an answer for you. It����ap built on the assumption that things recover and get better over time.

So, if you have that basic confidence in your gut, then work on training your brain. Put on paper how much you have in your stock portfolio now, then write down what it looks like if your portfolio falls another 20% or 30%. Envision the decline and accept it as part of the path toward building your longer-term wealth. I know it����ap not fun, but it����ap better to train your brain than not, and find yourself in a panic situation.

Instead of looking only at stock market declines, let����ap say you have a balanced portfolio between stocks and bonds. The traditional balanced approach is 60% stocks and 40% bonds. With the bonds, you’ll get some defense, but in a big market unwinding, the declines are still going to hurt. So even if you have a balanced portfolio, you should be prepared for what you might experience.

You may have seen charts illustrating the biggest calendar year declines for balanced and globally diversified portfolios. The number is roughly a negative 23%. But those charts are calendar year returns. Since most of us look at our portfolios more than once a year, to get a sense of the true decline you might see, you have to run the numbers on a daily basis. When you do that, the decline is negative 38%. Wow, that����ap a big difference.

If you are looking at these numbers and thinking you just can’t take that kind of decline, then you should revisit the amount of risk you are taking. Yes, markets are down now, but the decline is still modest in terms of the history of bear markets. Making adjustments at this stage is probably better than making them later if you think you’ll panic at the wrong time.

There is no right or optimal asset allocation that works for everybody. There is just the allocation that works for you.  But to get a sense of whether your allocation is right for you, you have to confront the range of outcomes you might experience and then train your brain to handle them.

Charlie Farrell is a partner and managing director at Beacon Pointe Advisors LLC. The information contained in this article is for general informational purposes only. ����aps referenced are as of the publication date and may be modified because of changes in the market or economic conditions and may not necessarily come to pass. All investments involve risks, including the loss of principal.

Soft Landing. You’ve heard it time and time again from our government officials, but the Fed’s goal is a soft landing. What that basically means is the Fed wants to bring inflation back to 2% without meaningfully slowing down the economy or causing much of an uptick in unemployment. It could happen, but many things have to go right for the Fed. If the Fed can engineer this result, expect the stock market to rally and interest rates on bonds to fall. We’ll basically be back to where we were in 2019. I put the odds of this at about 30%.

Hard Landing. A hard landing means the Fed drives inflation down to 2% regardless of how much pain it causes the economy. That means we may experience a tough recession and a significant rise in unemployment. Traditionally, this is how the Fed solves inflation. The Fed must crush demand to see prices fall. And to crush demand, people have to lose their jobs. If not, consumers basically keep spending.  Because consumer spending is 70% of the economy, the theory is you can’t stop the inflation juggernaut until you stop consumers.

If we head down this path, expect the stock market to fall fairly significantly, somewhere between 30% and 50%. But, the good news is, if the Fed brings down inflation to 2%, markets should recover once it����ap clear the inflation genie is back in the bottle. It won’t be comfortable, but the stock market declines should be in the rearview mirror within a few years.

I’d put the probability of this outcome at about 50%.

Stagnation. This third scenario is the more troubling one in terms of its potential impact on your retirement portfolio.  It����ap possible we could head down a path where the Fed doesn’t bring inflation to 2%. It could happen a couple of ways. First, if the Fed can’t engineer the soft landing and decides it����ap not worth the damage to push the economy into a deep recession, they may simply revise their goals. They could say something like, “We want to get to 2%, but not yet.” This leaves the 2% goal on the table, but pushes out the time horizon.

Conversely, the Fed may not be able to bring inflation to 2% even with a hard landing. There are many factors impacting inflation. If the Fed knew exactly what caused it, we wouldn’t have gotten any. So, it����ap certainly possible given the complexity of global markets that just raising interest rates may not be enough.

I’d say the odds of some sort of stagnation are maybe 20%. It����ap the least likely outcome, but the most troubling. A stagnation may cause investors to lose faith in the Fed and begin to rethink how they value stocks, bonds and real estate.

If we head down the soft or hard landing paths, investors probably don’t need to do too much. The market will likely recover, and all you’ll need to do is be patient and wait it out. In the stagnation scenario, however, the assumption that the stock market “always recovers within a few years” could be tested. Many people don’t remember that from the year 2000 through the end of 2012, the S&P 500 stock index had no price appreciation for 13 years. It had ups and downs, but at the end of that cycle, the market had actually gone down in price. This isn’t ancient history.

In Europe, they have a stock market index called the Stoxx 600, which is similar to our S&P 500 stock index. Since the year 2000, the Stoxx 600 has had an annualized price return of 0.64% for almost 23 years. Not many investors think modern markets can stagnate for over two decades, but they can.

Investors, however, tend to ignore scenarios where markets may stagnate for long periods. The reason is the odds of it happening are low, and there isn’t much you can do about it. Investors in general are in the same boat, and you just have to deal with it.

But if you are concerned about a cycle where markets stagnate, the main advice we can offer you is to simplify your financial life. You are unlikely to invest your way to riches if the rest of the world is stagnating. But you can do things like pay off your house, get out of debt, and drive your fixed expenses down as low as possible. It takes time, but you can simplify. That way, you’ll be in a much better position to handle this type of scenario than most people.

Alternatively, don’t worry about the stagnating scenario as it����ap unlikely to happen. No one can tell you which course is correct. You’ll have to decide that for yourself.

Charlie Farrell is a partner and managing director at Beacon Pointe Advisors LLC. The information contained in this article is for general informational purposes only. ����aps referenced are as of the publication date and may be modified because of changes in the market or economic conditions and may not necessarily come to pass. All investments involve risks, including the loss of principal.

�پ�����������ڲ�.�� You’ve likely heard this time and time again, but the foundation of any prudent investment portfolio is proper risk management. One aspect of risk management is diversification. Another element of risk management is proper sizing of positions – don’t put a material percentage of your investable assets in any one investment. While some crypto assets may have become worthless, if you had capped the size of the investment and were properly diversified, the collapse of one holding shouldn’t create a big challenge. For instance, if you had 1% of your assets in a crypto lending platform that evaporated, it would be disappointing but should not be life-altering. With any speculative asset, you should always assume it can go to zero. So don’t invest more than you can afford to lose.

Diversification also means diversification of asset types. A well-diversified portfolio should consist of a few fundamental asset classes such as stocks, bonds, real estate (if you can), and cash for emergency needs.  The more diversification you have, the less any one investment can do you harm. Plus, these asset classes often perform differently during different market cycles. For instance, right now stocks are down significantly, but cash is fine, short-term bonds have been defensive, and real estate is holding up fairly well. Four years ago, cash was not very exciting, but stocks were. These alternating cycles of returns can help reduce risk and volatility.

When a new investment category like crypto emerges, it����ap important to keep these concepts of diversification in mind. It can be tempting to chase the prospects of rapid wealth, but it must be tempered by prudent risk management. It����ap alright to invest in new things. Some are the real deal, transform the business world, and end up being highly valuable. But many end up on the scrap heap of finance. If you are going to venture into new and unproven areas, do it carefully and on top of a foundation of diversification.

Reasonable returns. Whenever some area of the financial market collapses, it is often preceded by a cycle of high returns and appeal to quick riches. This was true when the first tech bubble burst in 2000, with the real estate bubble ending in 2008, and with the crypto collapse. There were big gains, and some people got rich, at least temporarily. But if you chase big gains, you should expect you may end up with big losses.

The stock market alone is risky. As you may know, it can fall 50% or more in recessions or other market panics. For taking all that risk, the long-term annualized total return from stocks is about 10%. It����ap not 20% or 30%. Thus, if you believe an investment may return 20% or 30% in perpetuity, you are likely setting yourself up for disappointment or worse.  There can be cycles where some assets have high returns, but it generally does not last. If you invest in a rapidly appreciating sector, be prepared for the other side of that equation.

Regulations matter. One of the challenges with crypto investments and some of the platforms they operate on is that currently, they are unregulated. While it would be nice to think that people always do the right thing, as James Madison is credited with saying, “if men were angels, no government would be needed.”

If you venture into investments that are unregulated or lightly regulated, you should expect they may carry more operational risk than things that are regulated. That means they could collapse faster, you may have fewer options to get your money back, you may have fewer legal rights, and the government may not step in to help.

I realize this is a technical area of finance, but people who are financial professionals spend a great deal of time understanding and complying with regulations. They are important to help safeguard investors. Thus, if you are thinking of getting into something that isn’t regulated, expect that you may not have much recourse if things go badly. If you don’t know how an investment is regulated, you should not venture into it until you figure that out.

It����ap unfortunate that some investors have lost sizeable percentages of their portfolios in crypto. But history is replete with these types of lessons. Do yourself a favor and implement good risk management strategies for your money.  When you read stories about people who have lost their life’s savings, it����ap often because they failed to follow the fundamentals.

Charlie Farrell is a partner and managing director at Beacon Pointe Advisors LLC. The information contained in this article is for general informational purposes only. ����aps referenced are as of the publication date and may be modified because of changes in the market or economic conditions and may not necessarily come to pass. All investments involve risks, including the loss of principal.

We can debate until the cows come home why we are in this situation, what needs to be done to fix it, and when it will get corrected. But nobody knows how this process will proceed and what����ap in store for markets as the Federal Reserve ramps up its inflation-fighting activity. Thus, investors find themselves wondering what they should do.

I know this advice sounds trite, but it����ap the same advice you hear every time the stock market tanks. Basically, stay the course. The reason you hear it is because it has worked time and time again. Markets bend, but they have not broken. This advice is based on historical evidence, not just wishful thinking. And history is one of the main tools we have for assessing risks in markets. Every stock market decline has been followed by a recovery, and those who stayed the course were rewarded with more wealth. Those who left likely sold at lows and later bought back at much higher prices.

But I know what you’re thinking, “Yeah, historically it hasn’t broken, but there are no guarantees.”  Yes, that����ap correct — there are no guarantees. But if you want to invest in stocks, you have to accept this uncertainty. The uncertainty, however, changes with time. The more time that goes by, the higher the odds are that you’ll have gains. It����ap important to look beyond the current challenges. Markets and investors are resilient. They figure things out, but it����ap a process.

Right now, the U.S. economy is in a tough spot. Mistakes were made. Too much money was pumped into the economy to combat COVID-19, and now we have rampant inflation. That inflation needs to be brought under control. Inflation is a bigger threat to your long-term ability to accumulate wealth than a temporary bear market is. So, we should feel positive about the fact that the Federal Reserve is dealing with it. But it doesn’t make the process any more fun. Yet, we simply have to get through this.

Now, even though the standard advice is to stay fundamentally invested, there are some things you should do as we head into what could be another leg down for markets.

First, determine if your stock portfolio is fundamentally diversified. In general, that means owning a collection of companies that span multiple industries and sectors, such as industrials, technology, health care, financials, consumer staples, etc. You can easily diversify by using something like an S&P 500 index fund, a total stock market index fund, or any number of well-diversified mutual funds.

Diversification is important because when we talk about markets recovering, that statistic applies to diversified portfolios. If you only have a few stocks or are concentrated in a few sectors, your experience may not be reflective of an overall market recovery.

Second, review your portfolio to determine if you are holding investments that you don’t understand. If you don’t understand an investment, either talk to someone who can help you figure out what you own or consider moving on from that investment. Anecdotally, when I have encountered investors who have had unusually negative investment experiences, it����ap usually because they didn’t understand what they owned.

When I use the term understand, I mean you should understand what the risk and return profile is for the investment. For instance, is it designed to track the broad stock market? Or, is it designed to only track a sector, like energy or technology, or a specific style of investing such as value or growth? It����ap fine to hold any of these investments, but you should fundamentally understand what they are designed to do and whether they fit with the overall structure of your portfolio.

Third, if you need cash for expenses in the next four or five years, make sure you aren’t relying on stock market gains to provide that cash. Many bear markets are over in a few years, but some last longer. The 2008 stock market decline lasted roughly five years before it regained its previous high. To bridge these bear market gaps, consider holding some form of more stable assets that you can dip into if necessary. These would be things like cash, CDs, and U.S. Treasury bonds.

Fourth, work on your own spending and budget. This is a good time to tighten your belt and eliminate extraneous expenses that aren’t adding much value to your quality of life. Corporate America is already doing this. So, take a cue from them and start scouring your spending for things you can cut.

Staying fundamentally invested doesn’t mean “do nothing.” There are things you can do to prepare for what may be a tough cycle. It����ap like when the captain of a ship says, “batten down the hatches.”  The captain doesn’t plan on sinking, but they are getting prepared for a rough ride.

Charlie Farrell is a partner and managing director at Beacon Pointe Advisors LLC. The information contained in this article is for general informational purposes only. ����aps referenced are as of the publication date and may be modified because of changes in the market or economic conditions and may not necessarily come to pass. All investments involve risks, including the loss of principal.

One of the primary provisions in the bill is the expansion of Roth 401(k) features. The bill, as currently written, would allow employees to have employer matching contributions made to their Roth 401(k) accounts. The bill would also require catch-up contributions for older savers to be made into their Roth accounts.

Why is Congress so enamored with Roth savings features? One of the main reasons is that it accelerates income tax receipts. If you contribute money to a Roth 401(k), you do not receive a current income tax deduction, but the money grows tax-free going forward. If Congress wants you to use Roth accounts and pay taxes now, should you?

The Roth vs. Traditional 401(k) question causes a lot of confusion among investors. But in a nutshell, it����ap a simple analysis. The problem is the analysis requires you to make assumptions about future taxes that are not so simple.

The basic rule is that if you will pay a higher tax rate at the time of the contribution vs. the time of your distribution, you should use a traditional 401(k). For instance, if your tax rate today is 32% and in retirement it will be 24%, you should take the deduction now at 32%. Then when you distribute the money, you only pay tax at 24%. Thus, you save 8%.

Conversely, if your tax rate at contribution is lower (say 24%) than your tax rate at distribution (say 32%), then you should use a Roth. Basically, you pay tax today at 24% and avoid paying tax later at 32%. That����ap really all there is to it. But who can predict tax rates years or decades down the road? Therein lies the problem.

There are, however, a few situations where the answer is easier to figure out. If you’re a younger worker just starting in your career, it����ap likely the Roth feature will be the better bet.  The reason is your income is likely to be lower in your early years and then higher as you advance in your career. Thus, your income tax rate should be lower when you contribute the money vs. when you take it out 40 or more years later.

The other time it����ap more obvious is when you might have some sort of a windfall year for income. Let����ap say you got a big bonus or had stock options that you exercised, and that extra income pushes you into a higher tax bracket. In that case, a traditional 401(k) contribution will likely make the most sense. You’d be getting a deduction at a higher tax rate and then paying tax on the money at a lower rate when you retire.

And finally, if you happen to consistently be in the top 1% of wage earners, and you believe you will be in the highest bracket as well in retirement, then it may make sense to use the Roth feature. You are paying the same tax rate while working as retired, so it doesn’t really matter, but you at least get the tax-free growth and no required minimum distributions to deal with later in your retirement.

But just about every other scenario is more of a toss-up. Let����ap say you are in your mid-40s, married, and in the 22% federal tax bracket, which goes from around $83,000 up to about $178,000 of income. When you retire, maybe your income is still in that range, or maybe it����ap higher or lower. Maybe tax rates for that income bracket go down to 20% or up to 25%. Who knows? Those are all reasonable assumptions and there is no way to predict your future tax rate within a few percentage points.

So, what should you do? Well, a reasonable approach, given the uncertainty, is to split your contribution. If you are putting money in a 401(k), consider putting half in the traditional side and get the tax deduction today. Then put half in the Roth side, pay taxes now, but get tax-free growth later.

You can create all sorts of complicated assumptions about your income and future tax brackets, but you are just guessing. Congress can change the rates and brackets at any time, and they do change them all the time. Moreover, while Roth accounts are tax-free now, there is no guarantee they’ll be tax-free forever for every taxpayer. Recently, some Congressional leaders have suggested taxing unrealized capital gains for the wealthy. We’ve never done that before. It����ap not likely to pass, but you get the point.

If you are like most people and in the middle of the income tax brackets, consider splitting your contributions. Then don’t think about it much until they change the rules again.

Charlie Farrell is a partner and managing director at Beacon Pointe Advisors LLC. The information contained in this article is for general informational purposes only. ����aps referenced are as of the publication date and may be modified because of changes in the market or economic conditions and may not necessarily come to pass. All investments involve risks, including the loss of principal.

Let����ap assume you retire with $1 million and want to take a 4% inflation-adjusted distribution from your portfolio (4% is the general default rate for retirement planning). That means in the first year, you’d take $40,000 and increase that amount every year by the inflation rate. Let����ap now assume inflation runs at 4% a year, which is half of its current rate of about 8%.

If you put your money in a savings account and roughly earned zero, which is about the going rate these days, you’d be out of money in 17 years. The reason is your distribution starts at $40,000 per year, and with 4% inflation, rises to $75,000 by year 17, or a distribution rate of about 7.5% per year.

If you want a chance of maintaining your principal balance at $1 million throughout your retirement and distributing 4%, you’d need a return of about 6.75%. You might think 6.75% shouldn’t be too hard. But with interest rates stuck around 2.3%, on a typical 60% stock / 40% bond portfolio, you’d need stock returns of about 10% for the next 30 years. Consider that since the year 2000, the annualized total return for the S&P 500 is only 7.2%.  And that was during a period of sizeable support for markets from the federal government.

Going forward, it����ap not looking like we’ll have as much of a tailwind. Inflation is way above any manageable level, interest rates are rising, and Fed support for financial markets is waning. The factors that supported the markets are now being put into reverse, so one should expect it will be a tougher row to hoe. The bottom line is that if inflation runs hot, the typical balanced portfolio between stocks and bonds is less likely to produce the returns you need going forward.

So, if investors need higher returns, how do they get them? Maybe you could do a better job picking stocks and bonds and “beat” the market. Maybe, but it����ap unlikely. And even if you did, the return difference over 30 years is likely to be measured in fractions of a percentage.

It����ap like the 100-meter dash at the Olympics. Everyone in the race is world class, and the winner is just barely ahead of the overall field. That����ap how the financial markets work. It����ap full of world-class competitors, and the winners are just barely ahead of the rest of the field. Thus, I wouldn’t bank on better performance making the difference. If returns are low and inflation is high going forward, it����ap going to be tough for all of us.

The next question is: if you can’t do much about the returns side, what should you do? Well, you have to look at the expense side. Inflation is a number that gives us a rough read on how prices are rising across the economy. But your personal inflation rate might be very different. This is the side of the equation where you can have the most impact.

For instance, if you own your home and it����ap paid off, then housing inflation doesn’t impact you much. If car prices are rising, you can keep your car longer, or next time you buy one, skip the premium features and go with a basic model. If it costs more to go on a vacation, you can do something less elaborate. The list of potential budget adjustments is long, and each person has to decide what����ap important for their lifestyle. But consider that if inflation runs 4%, and your personal inflation rate is only 2%, then you are back to a low inflation environment, and retirement gets a lot easier.

Right now, the highest probability bet is to focus on what you can control, which is to lower your personal inflation rate.  Then let����ap see how markets do. The economy is surprisingly resilient, so the returns might be there eventually, or maybe inflation fades away. But just in case we face structurally higher inflation, work on getting your expenses as low as possible.

Charlie Farrell is a partner and managing director at Beacon Pointe Advisors LLC. The information contained in this article is for general informational purposes only. ����aps referenced are as of the publication date and may be modified because of changes in the market or economic conditions and may not necessarily come to pass. All investments involve risks, including the loss of principal.