Understanding market downturns with BlackRock

In episode 15 of the Financial Checkup, BlackRock - the world’s largest asset manager and partner for the Advantages Retirement Plan™ - discusses market ups and downs, the impact of the pandemic, and how target date funds help you weather market volatility.

Transcript

Farzan Qureshi: Now we know markets may be down, but really for underlying investors, such as you and me, it's really about time in the markets and not timing the markets.

Speaker 2:  Welcome to the Financial Checkup, a podcast series devoted to improving the financial health and retirement readiness of physicians and their spouses or common law partners. This series is brought to you by the award-winning Advantages Retirement plan from OMA insurance.

Alex Mazer:  My name is Alex Mazer. I'm the co-founder and co CEO of Commonwealth.

Farzan Qureshi: Hi, my name is Farzan Qureshi. I'm a director retirement strategist at BlackRock in Toronto.

Speaker 2: This series is for educational purposes and should not be considered investment, tax, financial or other professional advice. The views or opinions expressed by the presenters are solely their own and do not necessarily represent the views or opinions of BlackRock, the OMA, OMA insurance, or the Advantages Retirement plan.

Alex Mazer: Farzan, most physicians are aware by now that we're currently in a market downturn. Could you shed some light about what's been driving this downturn?

Farzan Qureshi: Sure. I mean a really complicated question and a difficult answer, but obviously, we've all known what's happened in the last few years. We had a massive COVID worldwide pandemic that shut down most economies around the world for 12 to 24 months. Some even longer. During that shutdown, consumers shifted their spending from services, going out to restaurants and the trampoline park to goods. Buying stuff for their homes, buying stuff in construction, et cetera.

At the same time, these shutdowns caused supply chains and shipping chains to break down, as people were not at work. Excess demand for goods, that we are all trying to buy caused this initial bout of inflation. Following that initial bout, we've also obviously had the tragic war in Russia and Ukraine. That exacerbated this supply shock that we see in the market and specifically around food and energy.

As a result of all this, central banks have now stepped up and said, "Hey, we need to solve this inflation problem." And their reaction function has been to raise interest rates over the last number of years. As we all know, interest rates have been coming down because there has been no inflation. Now we've suddenly got a lot of inflation with increased central bank activity in the marketplace. As central banks have raised interest rates, there has been a resetting of growth rates in the equity markets effectively. If you want equities to deliver, you'd need them to deliver more than what the central banks are delivering in terms of that interest rate. And so interest rates are up. There's been a shift and re-rating in assets as a result. And the growth rates, those companies that have growth and earnings coming much down in the future... that has to be re-rated given this higher interest rate environment.

And so you've seen markets as a result, react markets are down. The other concerns are now as central banks are raising interest rates and destroying demand, that these companies themselves are going to feel some of that earnings pressure and earnings recession that's coming. We're not seeing that yet, but there is this feeling that as interest rates pinch consumers, as they don't have as much money to spend, that they're going to not spend on those services and goods. And companies will have to adjust their expectations and results as a result and effectively, people are looking for this negative market reaction, even now going forward.

Alex Mazer: You mentioned a lot of factors Farzan. We have COVID, we have supply chain issues. We have inflation, we have interest rates. Some physicians are asking, "Should I be doing things differently with my retirement investments in light of everything that's been going on over the last six months, over the last couple of years" What guidance might you offer to a retirement saver, retirement investor, about how to respond to these challenges?

Farzan Qureshi: It's a really tricky time for investors. But what we always say to investors, what I always say to my friends and brothers and others who are trying to invest. If you're invested in a diversified portfolio, for example, a target date fund, these target date funds are designed to withstand these types of market shots. Both in terms of that market environment, because they have a really long time horizon, they're well diversified, but they also have exposure to different asset classes that do play into inflation.

We know that equities over the long term do have an inflation pass through and tend to beat inflation over the long term. We also know that a lot of these diversified portfolios have additional asset classes that are specifically targeting that inflation and the shock inflation. Things like real estate, infrastructure, commodities and real return bonds, all help hedge and mitigate that inflation impact in portfolios.

Our recommendation to plan participants is stay the course. If you are invested in a multi-asset diversified target date fund type of strategy, that strategy is taking into account a really long time horizon that takes into account these market shocks ups and downs. It takes into account inflation. It takes into account interest rates and is appropriately positioned.

Now we know markets may be down, but really for underlying investors, such as you and me, it's really about time in the markets and not timing the markets. And I'll give you one very simple example. If you were invested in the S and P TSX, the Canadian equity market over the last 20 years. If you had invested a hundred thousand dollars, today you would have about $220,000 20 years later. If you were invested that whole time. However, if you missed the five top trading days over that 20 year period, just the five top trading days, your total assets today after 20 years would not be $200,000. It would be $`120,000 starting from your a hundred thousand beginning.

So we don't know what those five or 10 top market trading days will be. We don't want to miss out on them. It's very, very difficult to time what those market days will be. So it's really not about timing the markets, but time invested in the markets. And we would encourage participants to stay the course. We have been managing defined contribution and target date funds since 1993. We've seen many ups and downs, the.com boom and bust, the great financial crisis, 9/11, all these different environments. Markets do come back. We just don't know when they're going to come back. The real key is to stay invested. If you're in a broadly diversified portfolio, stay invested. That portfolio will come back as markets always do.

Alex Mazer: What you're saying is that sometimes some of the best returns come at unpredictable times and it can come in a short burst. And you want to make sure that you continue to be invested during those times because very few people, if anybody, can predict when those things are going to happen. And does that mean continuing to contribute as well to your plan? Should people be thinking about changing their contributions in your view, or is it about maintaining a kind of regular automated monthly or payroll based contribution?

Farzan Qureshi: Yeah. I think that uncertainty of knowing what the markets are going to do lends itself to that exact philosophy of making those regular contributions, those monthly, bimonthly paycheck, contributions that we tend to make. We got to keep making them during this time. You're actually buying into the markets on a discount, right? Markets are down 20%, they're on sale. We should be continuing to invest and continuing to dollar cost average over our lifetimes. And this is one of those periods where markets are down. You should not stop contributing. You should continue contributing and maintain that kind of pace to ensure that you are getting some benefit of that dollar cost averaging . You're buying low today and you want to be buying low and selling high. I think that is exactly what participants should be doing. Stay the course, maintain those contributions. Even though we're in a down market, there may be more downturn to come. But again, you're buying at a discount and you continue to dollar cost average over your lifetime. That will give you, as a participant, the best chance over the long term.

Alex Mazer: A lot of Canadians are experiencing a period of higher inflation for the first time in their lives. And I'm wondering if you could speak to how BlackRock has thought about the factor of inflation in designing the target date fund, the life path portfolios.

Farzan Qureshi: An inflation risk is one of those big risks that we've always considered even in the past 30 years when we've been in a period of lower inflation compared to historically. And as you've mentioned, many of us haven't seen such a boat of inflation in our lifetime. We grew up in the sixties or the seventies. And we were young when this all happened in the seventies and there was this big inflation spike. And ever since, we've seen a downward trajectory. Now, given the sort of things we talked about earlier, we're seeing this big inflation spike. But as investors BlackRock, we've always been concerned about inflation. We've always thought about inflation and has been part of our investment thesis around what we need to mitigate for participants. We know the increase in inflation does lead to an erosion of standard of living.

So if you're paying the same amount for all those things, or you're paying higher amount for the same amount of basket of goods, and you have this limited amount of money, you actually have to make some decisions on reducing your basket and effectively reducing consumption. And so it does affect standard of living. We know that. But we also know that your wages... If you're earning and you have a job, your wages also do adjust to inflation. And over time, we know that especially younger participants have that inflation hedging protection built in to some of their wages.

We know that older participants don't get as much inflation hedging. So we need to balance that in our portfolios for younger investors, we don't have as much inflation hedging asset classes. We have equities, which we know already equities and stocks do give you that inflation pass through, but very specific inflation hedging asset classes like real estate, infrastructure, and real return bonds and commodities are those asset classes that very specifically target inflation.

 Real estate. When there's an inflation spike, your landlord can raise rents. Same thing with infrastructure. When inflation goes up, the toll bridge operator can increase tolls, can increase those port charges. They respond to inflation much more quickly. The life path funds for younger investors do have the equity component that's large, meaning that they're getting that inflation protection through equities, as well as their wages. The older investors, who don't have as much equities in their portfolios, we want to make sure that they have those very specific inflation, hedging asset classes in their portfolios. So they have a little bit more exposure to real estate, to infrastructure, to commodities and real return bonds. So in the target date funds, we are taking into account inflation and especially this in high inflation regime, as we see it currently, the target date funds are automatically allocated to respond to this kind of inflationary environment.

Alex Mazer: So when plan members invest in a target date fund, they'll see some allocation to those asset classes. You talked about real estate infrastructure that protect against the effects of inflation, but then as they get older and protecting against those effects becomes more important, you're saying that allocation will grow within the target date fund.

Farzan Qureshi: That's right. That allocation to those real estate hedging asset classes will grow for older investors who don't have as much equities to buffet them from inflation and growth shocks.

Alex Mazer: We know that market downturns are things that happen. We don't know when they're going to happen, but we know that they will happen throughout history. How has BlackRock factored downturns into constructing the life path portfolio?

Farzan Qureshi: Yeah, that's a great point. We know that market risk is one of those big risks that participants are facing. In addition to human capital risk, the fact they might lose their job. Inflation risk, which we've talked about, sequencing risk, longevity risk, and income volatility risk. These are all the risks that participants face over their working and retirement life. We know market risk is one of those risks that if markets underperform, how can we deliver that type of return to participants?

That is where kind of the shape of the glide path or the overall asset allocation comes into play. We deliberately lean into growth and risk early on for young investors, knowing that they have this long, long time horizon. 40 plus years of working and maybe 20 plus years of retirement life. And so we lean into that equity growth early on, quite meaningfully, knowing that we've got this 40, 50 year horizon to deal with market impacts and market downturns. It's that asset allocation, that glide path of mix between stocks and bonds within the portfolio, that's going to drive that protection from market downturns. We want to lean into equities for growth, but we also have a big chunk of fixed income for participants as they get closer to retirement to protect them in retirement.

Alex Mazer: Well, thank you very much, Farzan. We really appreciate you taking the time to share your insights and BlackRock's perspective on investing through these challenging times.

Farzan Qureshi: Thank you for having me. Thank you to Commonwealth for being such a great partner to BlackRock. We continue to look forward to working closely with you and our mutual clients and plan sponsored partners together. Thank you.

Speaker 2:  The financial checkup series is producing collaboration with OMA insurance and Commonwealth, the administration and technology partner for the Advantages Retirement plan.