- For the legions of investors looking at their portfolios and wondering whether now is the time to cut losses, try to recall why you entered the position to begin with.
- Pullbacks are often a good time to do some soul-searching, and with the markets the way they are at the moment, there’s plenty of that going on already.
It’s been said that bears make money, bulls make money, but pigs get slaughtered.
For the legions of investors looking at their portfolios and wondering whether now is the time to cut losses, try to recall why you entered the position to begin with.
Trying to the time the market, to catch the highest highs and the lowest lows is an exercise in futility, far more relevant in investment decision-making is what prices reveal about expectations for the future.
Have markets sufficiently priced in worst-case scenarios to set the stage for a recovery?
Most long-term investors are not technical analysts (those who divine animal spirits from charts), which is why determining if now is a time to pick up some bargains on great companies requires some good old fundamental noodling.
Fundamental analysis is hard work and requires clarity on the economic backdrop, underlying corporate performance and accounting.
While equity bull markets may be driven by narrative and loose monetary conditions, bear market conditions often depend on reasonable valuations and sustainable business models.
For over a decade after the 2008 Financial Crisis, the cost of debt capital was essentially zero, facilitating distortions in asset markets and possibly over allocation into stocks and bonds, while encouraging greater risk tolerance in search of higher yields.
During these heady times, leverage made sense on corporate balance sheets and in alternative investment products, including private credit and private equity.
But as the world’s major central banks start to increase interest rates to combat the effects of inflation, a receding tide will finally reveal who’s been swimming without bathing suits on.
To be sure, it’s not a forgone conclusion that the Fed or any other central bank has the appetite to keep tightening indefinitely –Atlanta Fed’s President Raphael Bostic hinted earlier this week that he would consider a pause of rate hikes in September.
And then there’s how much investors are willing to pay for prospective corporate performance.
Although it may be tempting to return to value approaches to security selection, an entirely new generation of investors, Millennials and Gen Z, are coming to the forefront of markets as well, and the investment decision-making matrix of their forebears holds little sway for them.
Against this backdrop, investors with a bit of spare cash can consider the only free lunch in investing – diversification.
Supercharged tech companies clamoring eye-watering valuations have come back down to earth, but may have room to fall further.
Value stocks have so far failed to deliver on their promise of a safe harbor in difficult times.
As macro uncertainty reaches its zenith, investors may be better off reviewing their portfolios to understand why they look like that to begin with – was it chasing the crowd (FOMO) or was it because of an understanding and a belief in the long-term prospects of that firm?
Pullbacks are often a good time to do some soul-searching, and with the markets the way they are at the moment, there’s plenty of that going on already.