The Great Portfolio Reset: Insights & Strategies for 2022 with Liz Young, SoFi’s Head of Investment Strategy

Welcome to episode 68 of The Investopedia Express with Caleb Silver, recorded on January 10, 2022. This episode dives deep into the shifting investment landscape as the Federal Reserve signals the end of easy money policies. The Fed's December meeting minutes reveal plans to conclude government bond tapering by March, coinciding with the anticipated first interest rate hike of the year. Goldman Sachs forecasts up to four rate increases in 2022, marking a significant shift from recent years.

Despite a strong start with record highs for the Dow Industrials and S&P 500, markets cooled as Fed hawkishness unsettled growth stocks, particularly in tech and volatile assets like cryptocurrencies. After the best three-year performance since 1999, investors and strategists alike are recalibrating expectations for 2022. Yet, many remain committed to investing in stocks and ETFs, recognizing that past gains don't preclude future opportunities.

Meet Liz Young

Liz Young, CFA, leads investment strategy at SoFi, where she crafts and communicates vital economic and market insights. Passionate about investor education, Liz empowers SoFi members to make informed financial decisions. A seasoned public speaker and frequent CNBC contributor, she excels at simplifying complex financial concepts for diverse audiences.

Episode Highlights

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The equity market’s tone has shifted dramatically. While early 2022 saw indices near all-time highs, investor risk appetite is waning amid persistent inflation and the Fed’s tightening stance. The past three years rewarded U.S. equity investors handsomely, driven by big tech's dominance. However, history reminds us that market cycles can change swiftly, as seen in the 2000 tech bubble burst.

Caleb Silver: "With jitters mounting among investors entering 2022, many hesitate to engage in a volatile market facing rising rates. Liz, your insights are invaluable in guiding us through these uncertain times. Welcome to The Express."

Liz Young: "Thank you, Caleb. Excited to be here."

Caleb Silver: "SoFi’s platform attracts millions of investors of all ages. After recent years of gains, what is the current sentiment among your users?"

Liz Young: "Our user base tends to be younger and includes many new investors who joined during the pandemic. Younger investors often favor tech and growth sectors and have experienced phenomena like meme stocks. However, there’s also apprehension as monetary tightening approaches — an unfamiliar scenario for many. The Fed’s accelerating timeline for rate hikes contributes to nervousness across the board."

Caleb Silver: "You’ve described 2021 as running with the wind at our backs, and 2022 as running into the wind. Beyond rate hikes and Fed hawkishness, what other challenges lie ahead?"

Liz Young: "Inflation remains a major headwind, impacting both consumers and investors. While pent-up demand and savings fuel spending, higher prices squeeze budgets and dampen market sentiment. Additionally, competition intensifies across sectors. For example, tech companies face heightened innovation demands, and consumer brands must excel both online and in physical stores. Lastly, tough year-over-year growth comparisons will challenge earnings expectations as 2022 unfolds."

Caleb Silver: "Tech and small-cap stocks have experienced sharp sell-offs amid tapering talks. Can you explain why these sectors are especially sensitive to rising rates?"

Liz Young: "Tech stocks are ‘growth’ oriented, valued on future earnings discounted to present value using interest rates. As rates rise, the present value of future growth declines, pressuring high-multiple tech stocks even before actual hikes occur. Small caps are more cyclical and sensitive to economic growth. Concerns about the Fed ‘over-tightening’ create fears that growth could slow, negatively impacting small caps. Interestingly, small-cap value outperformed growth in 2021, signaling potential style divergences in 2022."

Caleb Silver: "Sector rotation is a hot topic. When should investors consider shifting allocations, and how can they do so responsibly?"

Liz Young: "Timing rotations is challenging. Last year, attempts to pivot away from tech faced resistance until the Fed’s tightening was unequivocal. With tapering underway and balance sheet reduction possible, 2022 may finally see sustained rotation into cyclicals. Investors should evaluate their portfolios and consider diversifying beyond traditional large-cap tech holdings, embracing sectors aligned with evolving economic conditions."

Investor Tip

Rising short-term bond yields typically reflect expectations of Fed rate hikes, while rising long-term yields indicate confidence that such hikes won’t trigger a recession.

Liz Young: "Investors should build a core portfolio foundation with broad market ETFs, such as equal-weighted S&P 500 funds to reduce concentration risk. Supplement this core with targeted ‘spokes’ like cyclicals, small caps, and international developed markets to capture growth opportunities in a changing environment. Cash allocation can also provide stability amid bond market challenges."

Caleb Silver: "For new investors with $10,000 to deploy, what’s your advice on constructing a responsible, long-term investment plan?"

Liz Young: "It’s fantastic that more people are investing today. ETFs offer accessible, low-cost diversification with minimal minimums, ideal for beginners. Think of your portfolio as a hub-and-spoke: the hub is your long-term equity core, and the spokes are strategic tilts based on market outlook. Maintain realistic expectations—2022 returns may not mirror recent years—and focus on staying invested through volatility."

Caleb Silver: "Many new investors fear market corrections. Do you believe they will stick with investing if volatility arises?"

Liz Young: "That’s a key concern. It’s easier to stay invested during gains than during downturns. Understanding market history helps; large drawdowns over 20% typically coincide with recessions, which we do not currently foresee. Beware of loss aversion—selling during dips locks in losses and can hinder long-term success. Setting appropriate expectations is essential for maintaining investment discipline."

Fast Fact

The S&P 500 financial sector posted a 5.4% gain last week, marking its best five-day start since 2010.

Caleb Silver: "What overlooked risk should investors watch in 2022?"

Liz Young: "Consumer credit is a significant, under-discussed risk. Elevated borrowing, especially auto loans with extended terms, combined with declining personal savings rates, may pressure consumers. ‘Revenge spending’ post-pandemic could lead to increased debt just as rates rise, potentially stressing credit markets in late 2022."

Caleb Silver: "Liz, you’ve shared many valuable insights today. What’s your favorite investment term that resonates with you?"

Liz Young: "I enjoy ‘contango’—when futures prices exceed spot prices, indicating expectations of rising asset values. But my top pick is ‘opportunity cost,’ essentially the cost of missed alternatives. It’s vital to reassess investments regularly and consider what you might be foregoing by holding onto certain assets, especially as market conditions evolve."

Caleb Silver: "Thank you, Liz Young, for your thoughtful analysis and guidance. Follow her on social media @lizyoungstrat and read her blog on SoFi for ongoing market insights. It’s been a pleasure having you on The Investopedia Express."

Liz Young: "Thank you for having me."

Term of the Week: Runoff

Historically, ‘runoff’ referred to the end-of-day process where stock prices were printed on ticker tape for dissemination. Today, it describes trades executed at the close of a session that may not be reported until the next trading day. In portfolio management, runoff signifies asset reduction due to maturity, liquidation, or withdrawals — a phenomenon investors may encounter during market downturns or economic uncertainty.

Thank you, Ed, for the great term suggestion. We’ll be sending you some warm socks to enjoy your next Lincoln Park stroll and Bacino’s deep-dish pizza. That sounds delicious!

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