How to weather economic storms

Now, you might be wondering why you are holding an umbrella open indoors. i am risking all of my future luck just to make a point. we would like to take this opportunity to discuss what new investors should know when they encounter financial uncertainties. join us for an episode i'm titling "bright ideas for slightly less bright skies." before we dive into the topic, let me end my weatherman impersonation.

prior to the start of this new season, we conducted an online poll to gather your perspectives on weather-related money management. stick around until the very end of the episode to see the results. now, let me introduce our special guest from fidelity, aek. aek, welcome. thank you, rod. i'm thrilled to be here and discuss the weather with you.

it's wonderful to have you here for this unique episode where we pretend to chat about the weather, but secretly delve into the realm of high-level finance. tell me about yourself. what does a typical day look like for you?

certainly. i am a portfolio manager in the global asset allocation group at fidelity. in my role, i oversee several mutual funds. my day usually begins with an analysis of overnight market developments and their implications for the portfolios i manage. it's akin to cracking weather systems.

as portfolio managers, research is crucial to our work. therefore, a significant portion of my day is dedicated to staying updated on the extensive research generated by fidelity. this ensures that we position our portfolios optimally to add value for our fund shareholders.

moving on to my first weather-related question, how are the skies looking these days?

i would say we have weathered a storm in 2022. interest rates increased, inflation reached its highest level in four decades, there was a war in ukraine, and cryptocurrencies experienced a downturn. moreover, there was a sell-off in the stock market. these were all unique conditions this year. while the skies have cleared somewhat, as is normal after a period of turbulence, we should remain watchful for pop-up showers throughout the year.

you used the phrase "weathering the storm," suggesting that even uncertain forecasts should not deter plans. although i will use any excuse to cancel plans, what would you say to newcomers who are apprehensive about the thunder and lightning?

you are not alone. most investors, whether new or experienced, experience fear at some point. it is natural to feel panicked when you witness a reduction in your balances. to provide some context to these feelings, i would break down my advice to new investors into three key points.

first, cultivate what i call an investor mindset. make investing as routine as paying your bills. this can help mitigate emotions attached to it.

second, understand your goals. if your objective is short-term, such as saving for a down payment on a home, your approach will differ from saving for retirement. the longer your time horizon, the more risk you can consider, as there is a greater potential for returns over time. importantly, having a longer time horizon allows for recovery from potential market downturns.

it seems that risk-taking and being prepared for storms go hand in hand. is that accurate?

indeed, both require an understanding of the cyclical nature of things. this brings me to my third point: familiarize yourself with diversification. fear and nervousness often arise when there is a significant drawdown in your portfolio. by diversifying your portfolio, you can expect a smoother ride. this helps you view drawdowns as opportunities rather than sources of fear. different assets perform differently depending on market conditions, and diversification allows for some correction. for example, during a rough period for equities, government bonds typically outperform. of course, surprises can still occur, much like with the weather.

earlier, you mentioned the relation between risk and the length of investment. some individuals may equate risk with stormy weather. are they inherently linked?

to some extent, risk may manifest as volatility or economic instability for everyday consumers. it can lead to higher interest rates and prices. for investors, it refers to the movement of their portfolios on a daily, monthly, or yearly basis. to mitigate this volatility, we aim to build portfolios where different assets thrive at different times. this is another way of understanding diversification. for newcomers, any addition to their investment portfolio counts as diversifying.

what a fascinating conversation we have had so far. thank you, aek, for joining me today. and to our viewers, stay tuned for more insights on weather-related money management.