Banish Fear (of) Markets – Issue 17/2022 – 6 October 2022
Here are two of The Economist’s front pages published in February. It warns of stock markets on the edge of a cliff and the impact of upcoming high interest rates. Very prescient given that markets crashed in June.
I have been a reader of The Economist since I was 16 years old (yes, I was geeky that way), and I have found that it is a great early warning system of major economic and market shifts.
Historically though, the warnings came very early, sometimes 1 or 2 years before they actually happened. So if you follow the early warning system too early, you could miss out on a year or more’s worth of exuberant gains, which could be substantial.
Not this time though. The Economist was right on the money. They wrote these front pages at the start of this year: Feb 5th and Feb 12th respectively. The Federal Reserve started the interest rate hikes the next month, then again in May, and then June, where the 75 basis point increase caused the US stock market rout to go into full gear.
I consider The Economist as my conservative financial adviser, warning me of big impending risks. My risk appetite is much higher, but The Economist allows me to do “what if” scenarios. What if indeed The Economist was right, can my financial position withstand their scenario?
I must admit, in February, when I read this, I was in a bit of a quandary. Do I sell my portfolio, which at the time was down at least 15% from its highs? On the other hand, I am a great believer in the adage “Time in the market is more lucrative than timing the market”.
So I performed the “what if” scenario. What if interest rates rise, and the stock market were to tank by another 20%, would my financial position be OK? Would there be any external pressure for me to liquidate my holdings?
My answer was not really, so I decided to stay invested. As it turned out, today, my portfolio is down a further 18% since February, close to my “what-if” scenario.
Given the early warning by The Economist, could I have done more to mitigate the damage? Certainly, I underestimated (and was a bit dismissive of) the potential impact of high interest rates on growth stocks. With hindsight, I could have rebalanced the portfolio towards blue chip stocks in the tech sector (e.g. Apple) and sell off a portion of my Not-For-the–Faint-Hearted portfolio. The interest rate had a disproportionate effect on that portfolio as investors used the heightened rates to discount the future cash flows and valuations of growth stocks.
Net, net, it’s been a really rough year so far, my portfolio is down 28% year-to-date. But thankfully, I have evaluated my “what-if” scenario in February, and I have been financially and psychologically prepared for a down year. For that, I have to thank The Economist.
Malek Ali, – Founder BFM 89.9, The Business Station – a CFP professional
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