Netflix and Facebook were two powerhouse stocks during the pandemic, rising 100% and 38% respectively between early 2020 and the Fall of 2021. But in recent months, each has fallen hard: As of April 22, Netflix had crashed 69% from its highs, and Meta (as Facebook's parent is now called) had plunged 34%.

These two stocks' fall should be a wakeup call, if any were still needed, for long-term investors: When high-momentum growth stocks fall out of favor with investors, they can sell off dramatically. Portfolios must be built to withstand changing market conditions and the volatility that often characterizes high-flying stocks.

The reasons for the fall of Netflix and Facebook—now called Meta-have to do with their growth prospects against a backdrop of rising interest rates. To help tame surging inflation, the Federal Reserve in March raised the benchmark federal funds rate for the first time since 2018; Wall Street expects the central bank to continue raising rates aggressively through this year and perhaps beyond. Rising interest rates are bad for growth stocks, a category that includes Netflix and Meta, whose valuations are predicated on robust future earnings.

Because growth companies are more dependent on borrowing, higher interest rates cut deeper into their earnings. Inflation also weakens the value of each dollar of future earnings, another turnoff for investors. But what really concerns investors in the cases of Meta and Netflix are dimming prospects for the companies' revenue growth.

Netflix lost subscribers for the first time in more than a decade during the first quarter, and it projects that it will lose two million more during the second quarter. Most analysts had expected the streaming company to add nearly 20 million net subscribers this year. As for Meta, its shares crashed by 26% on Feb. 3 following disappointing fourth-quarter earnings and the news that it had lost daily users for the first time ever. Meta is facing fierce competition from TikTok, and privacy changes implemented by Apple have hurt its ability to lure advertisers' dollars.

Netflix and Meta are big, established companies. But in a high-inflation, rising-rate environment, they have no room for error. These larger economic forces are slowing the economy and punishing stocks of companies that don't deliver near-term earnings growth. In some cases, like Meta's, a growth stock may be beat up so badly that it becomes a buy. It's a good bet that more high-flyers will fall, and investors who determine the point at which their price becomes attractive based on their earnings could be rewarded.

Meanwhile the market is rewarding value stocks—companies whose earnings are attractive compared with their stock price. The S&P 500 growth index is down 17% for the year, while the S&P value index is down just 2.6%.

The market's rotation to value is a reminder that long-term investors' portfolios must be built to endure different market and economic conditions. A collection of high-flyers like Facebook, Netflix and others might have done well during a period of low interest rates, low inflation, and work-from-home orders—but successful portfolios must be able to hold up during market downturns like the one we're experiencing now.

With economic headwinds likely to persist for at least several more months, this is a good time to review your investment holdings. Don't hesitate to reach out to us if you'd like to talk about how you can invest to achieve your goals.

The start of 2022 has been very volatile, especially in the technology sector, where investors have continued pulling their money out of high-growth and richly valued shares. In less than three months, the tech-heavy NASDAQ Composite index has plunged more than 12%, bringing the index into correction territory.

Technology stocks have fallen especially far because they had flown the highest in recent years. In late 2021, price-to-earnings ratios for the NASDAQ were over 30; today they are closer to 25.

Technology growth stocks have stumbled in large part because of expectations of higher interest rates, which are seen as particularly harmful for such businesses.

Predictably, work-from-home companies have been crushed by a combination of interest-rate fears and workers returning to the office—Zoom's P/E ratio has fallen in half, from 50 to 25, for instance. But investors sold indiscriminately ahead of the anticipated interest-rate hikes. So companies with sustainable long-term business strengths have seen their prices fall as well. Apple's P/E ratio has dipped from 32 to 27. Meta—the company behind Facebook, saw its P/E ratio fall from 24 at the end of last year to less than 16 recently. Amazon, which traded at 72 times earnings late last year, recently traded under 50.

So the market's selloff has clearly created opportunities. There may very well be more volatility ahead. But right now, big, durable technology companies -- flush with cash and touting strong revenues and earnings --can be had for prices that are much more attractive than they were even a few weeks ago.

It's possible that the worst of the tech-stock selloff is behind us. The Federal Reserve this month announced its first interest-rate increase since 2018, and signaled that six more rate hikes are likely in store for this year. That's removed some of the uncertainty that has plagued tech stocks.

Still, even the best-looking stocks are long-term plays, and investing is never without risk. Geopolitical hazards are among those that bear watching. Russia has invaded its neighbor Ukraine, and the global economic sanctions against it are helping to drive up prices on commodities like gas and wheat, which in turn is driving inflation more broadly.

But geopolitics could create even stronger headwinds for markets. A scenario in which China, emboldened by Russia's aggression, ends up taking over Taiwan, could create severe shocks for the global economy. Taiwan accounts for more than 90% of the world's advanced semiconductor production.

Still, I'm long-term bullish on stocks. And now is certainly a better time to invest than six or seven weeks ago. But as we enter a rising-rate environment, the days of all stocks rising together are over. The key now is to identify companies with fundamental financial strengths and sustainable business models, and to be patient through the possibly volatile weeks and months ahead. Don't hesitate to contact us if you'd like to discuss your investments.

You've heard of diversification: Spreading your investments around to avoid being over-exposed to any one type of asset. Done properly, diversification can help reduce the volatility of your portfolio over time while keeping you on track to meet your growth goals.

Then there's what we call di-worse-ification, a situation where an investment portfolio has so many stocks that the result is unnecessary risk without the benefit of higher returns. In fact, over-diversification can be a drag on returns. Imagine you bought Apple 30 years ago, when shares were still cheap, and held it; you'd have a massive return right now. On the other hand, if you invested in an index fund whose holdings included Apple, you'd likely have a far smaller return.

That's an over-simplified example, but you get the point. The more stocks you own, the more likely your returns will mirror the larger market's returns. Owning a limited number of high-conviction stocks, on the other hand, gives you a chance to beat the market. Of course that approach is not as safe as buying the market—there's no guarantee that high conviction portfolios won't underperform.

Over the past few years, there was less downside to owning funds with hundreds of holdings: Thanks to the federal government's fiscal and monetary policies, the broad market rose, and many index funds did well. However, the Federal Reserve is now pivoting to an inflation-fighting stance. It's expected to raise interest rates and wind down the bond purchases that have been propping up the economy and the markets.

As a consequence, we're moving into an environment in which it will be more important to distinguish between promising stocks and those that seem likely to stagnate or decline in the next few years. An over-diversified portfolio is more likely to include clunkers that will increase risk and dampen returns. Yes, broad portfolios will be more likely to match the overall market's rate of return, but as the first several weeks of 2022 have demonstrated, the jacked-up returns of the past few years have likely come to an end.

If you own shares of a big mutual fund, understand that the fund may not be nimble enough to quickly get rid of worrisome holdings. Many funds loaded up on work-from-home stocks while that category boomed, for instance. Those stocks have been crashing as Covid-19 concerns begin to wane. But large funds are wary of selling big blocks of stocks because, as they add supply to the market, they drive down the price of the stock before it's all been sold.

On a related note, many funds require each of their holdings to make up at least half a percent of their total holdings. That can make it hard for them to buy promising small-cap stocks, which typically have the most runway to grow.

The bottom line: Now is a good time to take a fresh look at your investment portfolio, to ensure you're confident in the sectors and individual stocks you own, to add names where you need to, and to potentially cut loose those you're not as confident in. Over the next few years, I expect that the market will continue to be volatile, but will reward investors who have constructed focused, forward-looking portfolios. Please don't hesitate to contact us if you'd like to discuss your investments.

The past several weeks has offered a good example of the effect that Federal Reserve decisions can have on the markets. With the central bank beginning to slow down the bond-buying that has helped support stocks during the pandemic, and signaling that it will soon begin raising interest rates as well, investors have begun to rotate away from speculative stocks and toward quality names.

The stay-at-home stocks that have boomed despite having lots of debt and little earnings are falling out of favor. Such stocks rely to a greater degree on borrowing, and are sensitive to interest-rate hikes, which increase the cost of borrowing. Thus, the long-term earnings potential of companies like Tesla or Peloton become less appealing when interest rates climb.

The tech-heavy NASDAQ index is down 7% since early November, and the poster child for expensive, shooting-star tech companies, the ARK Innovation ETF, is down nearly 40% since November 1. Meanwhile, the Vanguard S&P 500 Value Index Fund, chock-full of high-quality value stocks, is up 2%. Many of those companies were laggards as the hot tech stocks had their run, but the tables may now be turning.

In reaching for value stocks, investors are looking for companies with strong, reliable profits, low debt, and other measures of financial strength that allow them to do well in rising-rate environments. These kinds of businesses provide near-term cash flows, as opposed to the sometime-in-the-future cash flows of the highflying tech names. The stocks poised to benefit from the rotation are less sexy for sure—think banks and insurance companies instead of electric cars.

The anticipated higher rates, of course, are the result of persistently high inflation: The Consumer Price Index jumped 7% last year, its highest rate since 1982. The market is betting that the Fed will raise rates three times this year, and the degree of market volatility will depend in part on whether the Fed does more or less than that number.

But investors should think long-term. Rotations like the one we’re seeing can last six or 12 months, so there’s plenty of time to update your portfolio mix. An experienced investment advisor can help you to identify the best-positioned stocks going forward. If you’d like to make sure your investment mix is putting you in a position to succeed, don’t hesitate to get in touch.

Cryptocurrencies have taken off. Just 12 years since the debut of Bitcoin, the first crypto, the total value of all cryptocurrencies has soared to more than $2 billion globally. That's more than twice the value of U.S dollars in circulation.

Lots of investors have jumped on the crypto bandwagon, including celebrity billionaires like Elon Musk. I'm steering clear. In the short term, Bitcoin and other cryptocurrencies are wildly volatile. In the longer term, they carry heavy regulatory risk—governments around the world very well might pull the rug out from under crypto.

First, let's look at crypto's volatility. Bitcoin, the flagship cryptocurrency, is billed by many as a store of value akin to gold, but its price has gyrated wildly since its inception. Bitcoin's price has fallen by 32% since it hit a high of $69,000 in November, for example.

Why is crypto so volatile? It doesn't have inherent value like gold, which can be made into jewelry or put to other uses, or stocks, which represent shares of real-life companies. It's not widely used in legitimate commerce—you can't buy groceries with it, for example, nor does the IRS accept tax payments in Bitcoin. The value of crypto is based simply on what people are willing to pay for it, and there's no reason it couldn't go to a fraction of today's price. Could its price go through the roof? It's possible, but I see crypto as a very expensive lottery ticket.

The biggest risk to crypto's viability, however, is that it represents a challenge to governments around the world. As an anonymous currency, crypto is beloved by criminals, including the hackers who breached Colonial Pipeline Co. earlier this year, disrupting energy supplies in several states, and demanded Bitcoin as ransom. Its fans also include drug dealers and others engaged in illegal commerce. The most infamous example of crimes involving crypto was the Silk Road case.

So crypto is a direct challenge to governments' ability to fight crime. But more importantly, it's a challenge to governments' ability to control the value of their currencies and the strength of their economies. Central banks like the U.S. Federal Reserve increase and decrease the amount of money in circulation in order to influence interest rates, control inflation and support the economy. A competing currency would undercut the authority that governments derive from controlling their currencies.

Even though governments around the world are still deciding how to regulate crypto, crackdowns have already occurred. For instance, the Chinese government has banned businesses from making crypto transactions. In the U.S., the House of Representatives recently passed a bill to create a working group of regulators, industry executives and others to start looking at how crypto regulation might work. Not surprisingly, crypto-industry lobbying groups are springing up to try to minimize regulations. I take it as a sign that industry players are scared. Back in May, Perianne Boring, the head of the Chamber of Digital Commerce, one of the crypto lobbying groups, warned the industry: "If we don't start planning and taking action soon, we have everything to risk."

One reason so many people are passionate about cryptocurrencies is the libertarian idea that they are free from government control. If that changes, how much luster will crypto lose? If U.S. and other governments take a heavy hand, will people flood back to the dollar?

While no one can predict the future, we can certainly gauge risks, and the risks involved with crypto are too great for the average investor to take. In my opinion, investors should heed the words of Bill Gates: "My general thought would be that if you have less money than Elon Musk, you should probably watch out."