he stock market has seen a rocky kickoff to 2022, as investors turned pessimistic amid rising interest rates and the Federal Reserve removing stimulus from the economy. The S&P 500 Index has fallen by more than 10 percent from recent highs, and bonds have tumbled, too. With this volatile start and the prospect of higher rates later this year, how should investors proceed?
In a new Bankrate survey, a group of investing pros revealed where they’d recommend clients to invest in 2022 to further grow their wealth. We asked respondents in the First-Quarter Market Mavens survey: “Where, or how, would you advise a typical client to invest $10,000 right now?”
Their answers revolved around a few key themes, especially how to avoid being steamrolled by rising interest rates and falling bonds. Unsurprisingly, they made no mention of cryptocurrency, as our fourth-quarter survey revealed that many experts found it much too risky to invest.
Forecasts and analysis:
This article is one in a series discussing the results of Bankrate’s Market Mavens first-quarter survey:
- Market analysts see stocks jumping more than 11 percent over the coming year
- Experts forecast Treasury yields to push even higher over next 12 months
- Pros say these investments are among the top hedges in battle against high inflation
- Best ways to invest $10,000 in 2022, according to experts
How to invest $10,000 in 2022
The survey’s market watchers pointed to a number of strategies for thriving in 2022, with many alerting investors to the dangers of rising interest rates, as the Federal Reserve steps up its efforts to fight rising inflation.
1. Keep a balanced portfolio
The markets are expected to see significant volatility this year as the Fed raises interest rates and reduces other monetary stimulus to the financial system. Some of the survey’s respondents stressed the importance of building a balanced investment portfolio that’s resilient to volatility.
Dec Mullarkey, managing director, SLC Management, suggests investors with $10,000 invest 60 percent in U.S. stocks and 40 percent in shorter-term U.S. Treasurys that are two to five years out.
“Holding shorter-maturity debt, versus longer, leaves investors less exposed to rising rates and as those bonds quickly mature, investors can reinvest longer if higher rates materialize,” he says.
Brian Price, head of investment management at Commonwealth Financial Network, points to the benefits of diversification and especially cautions against investments that have been hot recently.
“I think it is important to focus on a diversified portfolio and not over allocate to sectors or themes that have meaningfully outperformed as of late,” he says. He points to the danger of what investors call “mean reversion,” which is the tendency of hot investments to underperform after a period of outperformance, ultimately moving closer to their long-term average return.
“Mean reversion is one of the most powerful forces in portfolio management, and I think there is merit in being a thoughtful contrarian when it comes to investing,” says Price.
One analyst recommended an even more defensive approach, given what he sees as the risks.
“I would invest 30 percent in technology growth stocks, 30 percent in the broad index, 10 percent in metals and keep 30 percent in cash until the S&P 500 completes a 20 percent correction,” says James Iuorio, managing director, TJM Institutional Services.
2. Stick with the blue chips
High-quality stocks – the so-called “blue chips” – are often a port in the storm, because they’re backed by strong companies that will continue to thrive over time. Blue chips include stocks such as Amazon, Apple and JPMorgan Chase.
Sam Stovall, chief investment strategist, CFRA Research, suggests investors put money to work in “high-quality blue chips that offer increasingly attractive yields.”
Many investors appreciate the income generated by dividend stocks, and the dividend offers some return even while the market may be volatile.
Clark A. Kendall, president and CEO, 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 increase revenue, earnings and dividends in the future as a hedge against inflation,” he says.
3. U.S. financials look like a great option
U.S. stocks are a perennial favorite because of the strong domestic business climate and generally robust growth that many see, at least over time. But even among this set, U.S. financials may be an especially good bet to thrive with rising rates.
Jeffrey Buchbinder, equity strategist, LPL Financial, says: “We would overweight U.S. stocks, well-diversified across market caps and styles with an overweight to financials and real estate.”
Financials such as banks tend to do well when interest rates are soaring. Other investors might stick with ETFs that are poised to do well when rates climb.
Buchbinder cautions about allocating too much to bonds that are highly sensitive to rising rates, such as longer-term bonds.
4. Seek out inflation-resistant bonds
The survey’s respondents were notably nervous around bonds because of the dangers of rising interest rates. That’s because bond prices decline as prevailing interest rates rise. This effect is most pronounced in longer-term bonds, which can suffer substantial declines as rates rise. In contrast, short-term bonds are less impacted, and very short-term bonds may feel almost no effect.
“Long-term U.S. Treasury and corporate bonds are the financial landmines of today’s market that investors need to stay away from,” according to Kendall.
Mullarkey notes that “yields on 5-year Treasury bonds are very close to 10-year yields, leaving little incentive to hold longer-maturity debt.”
If you need bond exposure, however, one option may be bonds that adjust for inflation. One popular option is called TIPS, or Treasury Inflation-Protected Securities. These U.S. government bonds are indexed to inflation, helping to protect investors.
That’s what Joseph Kalish, chief global macro strategist, Ned Davis Research, recommends for investors: “TIPS for inflation protection and better returns than low-yielding nominal Treasurys.”
Another option for inflation protection could be Series I savings bonds, where the payout adjusts every six months depending on the inflation rate. However, you’re limited to just a $10,000 investment every calendar year, and you’ll need to own the bonds for at least a year.
5. Value stocks may be an attractive choice
Value stocks were mentioned multiple times by survey respondents as an attractive option. Value stocks tend to perform well during periods of rising interest rates, while many investors move out of growth or momentum stocks, pushing this latter group lower.
Kenneth Chavis IV, CFP, senior wealth manager, LourdMurray, stresses that the right portfolio depends on the client’s “objectives, time frame and comfort with volatility.”
He suggests investors should “invest globally with a tilt to value-oriented stocks.”
Value stocks have been a popular pick among our investing experts in the last few quarterly Market Mavens surveys.
If you’re investing in individual stocks, it’s important to remember that stocks may be cheap for good reasons, such as the possibility that their business is permanently impaired. So you need to carefully analyze them before you buy. However, you can buy an ETF with value stocks in it and enjoy the power of diversification to reduce your risk and time spent analyzing stocks.
Bankrate’s first-quarter 2022 survey of stock market professionals was conducted from March 1-10 via an online poll. Survey requests were emailed to potential respondents nationwide, and responses were submitted voluntarily via a website. Responding 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, senior analyst, Cornerstone Wealth; Patrick J. O’Hare, chief 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, chief 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 wealth manager, LourdMurray; Kim Forrest, chief investment officer/founder, Bokeh Capital Partners.