By and large the past 9 years have been a remarkable time for investors. In the face of a terrifying meltdown in world markets during 2007/2008 across all asset categories, investors were reluctant initially “to get back on the horse” and commit hard earned money into risky assets.
However quantitative easing (QE) from a litany of sovereign buyers put liquidity back into world economies and led to the great bull run, which we never could have foreseen.
So where are we now?
Valuations have become very stretched, the US stock market reaching all time highs. Investors have been chasing a select group of highflying companies; the so called FAANG stocks – Facebook, Amazon, Apple, Netflix and Google, have seen their average P/E ratio rise to 115 compared with 22.5 for the S & P 500.
However, over the past week, significant losses have been suffered. Volatility levels, which had practically lain dormant for the past few years, have spiked. This was triggered by a fear over potential rising interest rates and a sell off accrued. This “sell off” was further exacerbated by machine-based trading.
We are likely to see QE literally “easing off” over the next number of months. This should push bond yields higher and interest rates look set to gradually rise everywhere over the next few years. We are now probably entering into a period of greater volatility and nervousness. Uncertain times lie ahead and a more cautious approach to investing may be better rewarded in the shorter term
The best defensive measures that an investor can adapt are the following:
- Know how much risk you are prepared to accept
- Always have an emergency fund available in liquid cash
- Don’t be a forced seller in weak markets
- Adapt a time frame long enough to let the market do its thing
- Don’t let emotion get in the way of a sound investment approach
- Don’t be spooked by the noise of media inducing panic
- Diversify Diversify Diversify
- Seek help – you don’t have to do this all on your own
CARL RICHARDS is the creator of the Sketch Guy column in the New York Times.