Confirmed. Interest Rates Are Rising. How Do We React?
Banish Fear (of) Markets - Issue 13/2022 - 11 April 2022
It has long been on the cards, and it looks like it’s finally happening.
News came out last week that the Federal Reserve will begin a “rapid” reduction of it’s US$9 trillion balance sheet as soon as next month. The expectation also is that the Fed will raise its rate by 50 basis points (0.5%) in June.
Markets deemed this as aggressive and S&P 500 closed 1.3% down for the week, with Nasdaq faring worse to close 3.9% down.??
As a long term investor who does not have much bandwidth to trade in and out of markets, how does one react to news like this?
The fact that the Fed was going to tighten has been on the cards since the start of the year, when analysts increasingly recognised that the inflation we are experiencing is no longer transient. My problem is, as an investor, what can I do about it?
Should I rotate out of stocks that I believe have fantastic long term potential (e.g. tech) into inflation-proof stocks (e.g. commodities, financial services)?
I think if you’re a professional fund manager and you watch the markets daily, you certainly have the option of making short term rotational moves according to the latest news flow. But if you’re a retail investor who has a full-time day job (like me), short term moves do not quite work. It’s hard to keep up with the news flow, and sentiments can shift overnight, causing you to be caught at the wrong end of sudden changes in market direction.
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I prefer to look at the reason why I invested in those companies in the first place and see if there is anything in the economic or business?environment that changes the outlook of those companies. If the answer is simply that higher interest rates would change how analysts value the company (because in their spreadsheet formula they are now using a higher discount rate), then I ignore it.
In most companies I invest in, higher interest rates do not change the fundamentals of? their business. Amazon is still going to roll-out their AWS services around the world, Nvidia is still going to make these amazing graphic chips that power data centres, crypto-mining and the upcoming virtual/augmented reality world and Adobe, Salesforce, Microsoft and Atlassian are still going to sell their cloud-based productivity software to work teams around the world.
I worry more about how TikTok audiences and Apple policies will impact my investment in Meta, how sanctions against Russia will impact my investment in Visa/Mastercard or how the Chinese government’s disdainful view of private enterprise impacts my investment in Tencent, Alibaba and Meituan.
Such an approach does incur short-term pain. My portfolio was down by 3.5% last week. But I do look forward to the potential long-term gain.
Disclaimer
This column is to help people who fear investing to experience the investment rationale of a long term investor in global stock markets. It is for informational purposes only and not intended as advice or recommendation to buy any stocks. Please consult a licensed professional adviser before making any investment decisions.
Malek Ali , Founder BFM 89.9 – The Business Station, CFP Professional?
Professional Speaker, Trainer, Author | Leap Leadership Academy | Past President of MAPS
2 年Well said. Look at why we are investing in the first place, rather than being reactive all the time.
Founder @ thatfinanceguy.com | Strathclyde MBA Candidate
2 年Love reading your simple and practical explanations Malek Ali. Indeed, we experience a temporary market shock as fund managers’ often react instantly in maximizing gains/mitigating losses. Most of the time, this turns out to be a short term blip and market eventually adjusts itself after some time. Also a good opportunity to accumulate shares of organizations with strong fundamentals as you have previously pointed out in one of your earlier writings ??
Head Of IoT and Telematics
2 年Not on complacency but on high octane permissable actions...
CEO & Co-Founder at Akru
2 年A great introspection. If you were going to buy and hold, I'm just wondering if more diversification could let you make the same long term returns but with less risk or higher returns with the current risks
Empowering Investors with a Consistent Trading Strategy for Growth | Integrity & Sustainability at Core
2 年Agreed with you. For most retail investors, simply wouldn't make sense to switch out of growth stocks to go into more defensive stocks. Even the professionals that watch the markets all the time find it hard to time the market.