Whether its shifting interest rates, soaring inflation, or heightened geopolitical tension, there’s a lot of short-term risk and uncertainty on the table right now.
The reality is, investors are quite right to be cautious – a look at the volatile performance of any major index since the beginning of this year alone can show you that.
With all this in mind, it’s hardly surprising that in May, Bank of America reported the average cash holding of a global asset allocator to be at its highest level since 9/11.
But should this really be the case?
A major part of any investment professional’s job should be to see the forest when the rest of the market sees the trees. As Warren Buffett, the Sage of Omaha himself, once said: “Be fearful when others are greedy and greedy when others are fearful”.
With so much value on the table in today’s period of economic retraction, there’s a strong argument to be made that right now is the time for investment professionals to be brave. Indeed, rather than hide in cash, these individuals must instead ask themselves a critical question: What can I do today that my clients will thank me for in five years’ time?
I suspect in this inflationary time, the answer won’t be, ‘sitting in cash.’
It’s difficult but rather than peering into the seemingly bottomless abyss of bad news, we should lift our heads, look across to the other side, and consider what opportunities we can exploit in the current volatility.
The bottom line is, markets are cyclical.
That doesn’t mean they are easy to predict, but it does mean they tend to follow a sequence of stages over time. It’s the macro events that are unknown and that trigger the move from one stage to the next.
After a prolonged period of ultra-loose monetary policy and escalating equity valuations, a move from market “euphoria” into bearish territory was inevitable coming into 2022. However, it’s clear now that post-pandemic inflation, central bank tightening, and uncertainty around the Ukraine crisis were together enough to catalyse the beginning of this transition.
While the days of simply investing in something indiscriminately and watching its value rise may now be over, markets have made this transition time and time again throughout history, and every time, it has been possible to enhance returns by choosing the right investments while they were trading at a discount.
The idea that bottomed-out markets offer an opportunity to scoop up bargains to maximise upside potential is no doubt an attractive one although, in practice, this approach is by no means easy.
Increasingly short-term reporting requirements and a natural tendency to focus on the news headlines rather than individual stock fundamentals tend to make us blind to opportunities or shrink from making the bold call to invest.
Maybe it’s the memory of that saying from 2001 that a stock that’s fallen 90% is one that fell 80% and then halved. Whatever it is that deters us, being greedy when others are fearful isn’t easy but you wait, at some point after markets have recovered some smart aleck will tell you, “The easy money has been made”.
Making the best of it
There’s no question that the responsibility of managing someone’s money can be a daunting one at a time when everything seems to be collapsing in value. However, it’s important to keep perspective and take Warren Buffet’s advice – markets have recovered many times before and they will again, but you can’t partake in a market recovery if you’re invested in cash.
It’s critical to stick to the fundamental principles of investing and leverage today’s weakness as an opportunity, always asking oneself: What can I do today that my clients will thank me for in five years’ time?
The above article has been prepared for investment professionals. Any other readers should note this content does not constitute advice or a solicitation to buy, sell, or hold any investment. We strongly recommend speaking to an investment adviser before taking any action based on the information contained in this article.
Please also note the value of investments and the income you get from them may fall as well as rise, and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.