Investments do rise and do fall in value and we strongly advise that professional advice is taken before investing your money
For the speculators out there, they are always worrying if the stockmarket is going to drop/ collapse/crash, I even heard a respected Fund Manager who is a regular guest on CNBC (business channel) say that he is ‘dancing nearer to the doors these days’…
I would like to suggest that if you are an investor and not a speculator, there is sufficient data and real experiences to suggest that worrying about short term volatility is a fool's game. In fact, investors like Warren Buffet are not ‘dancing near the door’, rather they would be relishing the opportunity of buying assets more cheaply if the chance was to become available. They see low prices as an opportunity, a chance to buy more of what they like at a good price as opposed to selling at a loss.
Investors have often been referred to as lemmings, meaning that on the whole everyone tends to follow the herd, without thinking rationally. The stock market seems to be the odd situation where if you can buy something at a lower price than previously quoted then it’s no longer a good investment, but surely if it was a good investment before and you can buy it at a lower price then it’s potentially better value now! The unfortunate fact is that the human psyche struggles with this concept when it comes to investing.
The stock market is like Jekyll and Hyde and regularly swings between euphoria and despair. Recognising this fact and not panicking can be part of the path to long-term success!
Yes, the stock market is reaching the ‘mature’ part of this economic cycle, but I would suggest that as this recovery has been manipulated since the Financial Crisis by quantitative easing etc, therefore this cycle is not ‘normal’ by definition. Yes, many things can and do go wrong resulting in sudden market drops, but my view is that at this time, due to the cost of money being low and central bank interventions currently ongoing, this bull market has still more time to run.
In fact a good piece of evidence supplied by Invesco Perpetual as presented to investment professionals says that it is not until the US yield curve has inverted that history shows that a recession is approaching, I quote, ‘However, the lead time between yield curve inversion and the start of recession tends to be quite long: 21 months, on average, over the last five US recessions. Furthermore, there is also a lag of 18 months, on average over the last five recessions, between yield curve inversion and the peak of the equity market; and the capital returns from the S&P 500 Index during that period have been strong (24.3%, on average). Past performance is not a guide to future returns.’
So as always this is not necessarily how things are going to evolve, but this research does indicate until this happens in relation to the S&P 500 index there is likely to be more gains to be achieved, before ‘a recession removes the weak holders and the strong take back their market share’ ready for the next business cycle and in terms of protecting ones portfolio, a move or increase in fixed interest or more value based funds would offer some potential downside protection or even upside wins.
We at SMA continually review academic research and see what relevance this has to our client’s portfolios and are ready to change strategy as and when the economic back drop/investment style changes. If you would like to discuss how we may be able to add value to your portfolio, please do contact us.
Author Steven Mufti is a qualified investment professional and this review is relevant at the time of publication. We do strongly recommend that you take professional advice before buying or selling any investment.
Steven is a Fellow of the Personal Finance Society, whom is passionate about investing and getting the most from your money.
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