The last proper stock market crash and recession was 18 years ago – long enough time for most investors of that time to look back, remember the scars, yet glad they survived as the stock market has yielded manifold returns since then. After all, time is a great healer. The cohort of retail investors who started since then have generally seen a bullish run, with covid-induced crash just a spot of little bother.
So, when a wise and fabled investor calls time on the market, you tend to pay some attention.
But, when there is a chorus of wise and fabled investors are bearish on the stock market, you pay a lot of attention.
Their broad consensus narrative goes like this
Sky-high Valuations – The long-term historical Price-Earning Ratio is 17 vs the current 42 – this is more than double. Either earnings have to catchup or stock prices have to fall down. One of them is the most plausible.
Persistent high inflation – Most developed countries target 2% inflation – just enough to grow the economy without you and me feeling the pain of price rises. But in the last 5 years, it’s been harder to contain it, which directly impacts interest rates, and so the cost of goods. This creates a vicious cycle of high inflation.
Perma-crisis of geopolitics – In a complicated diverse world of divergent priorities, there is bound to be innumerable disagreements, quarrels and wars. With the global economy ever more integrated than ever, a conflict anywhere causes chaos everywhere. The war in Ukraine had an impact on global grain prices, whilst the Iran war rocked the oil prices with domino effect.
AI bubble – The investment flows into AI has all the hallmarks of every bubble of the past – the benefits of the inventions are real, more investments flows causing overcrowding, a correction happens, bubble bursts.
Correction overdue – The bull party has been going on for so long, the music has to stop anytime soon. The law of economic cycle means what goes up will come down and then go up . . . and then down . . .and so on
Last October, I covered in ‘So you think the bubble will burst?’ a slightly contrarian perspective on why it may not be bubble territory then.
Ten months later, even to the untrained mind to the enigmatic workings of the financial markets, there is an uneasy feeling that everything may not be hunky dory. Your heart says do something. Your head knows something needs to be done. But your hands don’t know what to do!
If you follow the experts’ vibes and sell now, you risk losing out on the upside (as did some of the wise and fabled investors).
If you ignore their vibes and stay invested, you risk losing out when the market may slide.
Damn if you do! Damn if you don’t!
In times like this, your Financial Plan should be your North Star, which will guide you with
Clear goals aligned to your life stage and life plans
Strong foundations of Emergency Funds, Life Insurance, Critical Insurance and Health Insurance
Automate regular investment through Pound Cost Averaging
A well-diversified portfolio across asset classes, geographies, sectors and risk profiles. If you choose to double down on a certain category, accept the associated concentration risk. It may or may not pay-off.
Rebalance your portfolio at least every year, to bring it in line with your target allocation
Create multiple streams of income
Stick to the financial plan
Rather than Optimise for highest return (which is a soulmate of highest risk), we should Optimise for peace of mind.
See you next week. Do good work!
👉 If you enjoyed reading this post, feel free to share it with family and friends, who may benefit from it! Or feel free to click the ❤️ button on this post so more people can discover it on Substack.
Comments
Nothing yet. Say the first thing.
Sign in to join the conversation.