When there is a substantial increase in food and energy prices, a sharp rise in interest rates, major disturbance in the supply chain, and a dangerous, may be escalating war in Europe, you do not expect massive amounts of investors to jump in and buy stocks. You rather expect them to sit on the fence or even sell.
But in fact, it is the high volatility that confuses the even experienced investor. One day the market is down big times and the next day it is up big. The day after it is down again. This happens when short term traders and and long term investors are trying to sort out possible scenarios, short term and long term.
But long term investors should know that bull markets begin well before there is an uptick in fundamentals or sentiment. Therefore they should not try to time the market. Best is to prepare your portfolio for whatever lies ahead, because it is impossible to guess what happens next.
History shows that early in a bull market, microcaps tend to do the best, then small caps, then midcaps and finally large caps, in bear markets it is the opposite. So, if you want to protect your portfolio against more downside, stick to larger companies. If you want to maximize your upside in the next upturn, concentrate on smaller companies.
Spread your risk both within the stock market and outside of it (asset allocation). Your portfolio will hold up better in the downturn that way and you’ll be well positioned to earn handsome profits when things turn around. The turnaround will come. Sooner or later. As always eventually.
Sven Franssen