It almost feels like a lifetime ago when meme stocks (and their owners!) were dancing on the moon and when tech was flying as high as can be. Our world looks totally different now, doesn’t it? It’s almost unrecognisable. Interest rates are no longer glued to the ground. They’re now the ones trying to get to the moon! Oh how the tables have turned.
This dawn of higher interest rates means that investors are no longer dishing out their money willy-nilly. There’s far less liquidity sloshing about and this is seriously hurting all those high-growth-not-yet-profit-making stocks. The kind who hoover up capital for god-knows-how-long till they eventually turn a profit. Ha! What a time! (Read here about this one top tip on how to navigate market madness)
Investors aren’t being so generous anymore. No way Jose. They’re getting stricter on who (and how much $$$) they hand out to companies because the investment scene right now is super uncertain. Rising rates cast a massive cloud on these speculative stocks since it raises overall borrowing costs and it also lowers their valuations since the present value of future earnings is being discounted by a greater amount thanks to higher interest rates. (Read here though why all this isn’t stopping people from starting their own biz!)
Valuations are coming down as quickly as they went up
The collapse in valuations of many of these sorts of companies have seriously hurt retail investors this year who were all about the growth. They couldn’t get enough of it. And for a while (basically ever since ’08) this made a whole lotta sense thanks to the combo of low rates and opening of the QE floodgates. Liquidity was streaming everywhere.
So growth became the snazzy and glam one in town. Let’s face it, it was all the rage. Back in 2021, when I was holding my ‘nerdy’ companies – the ones that paid dividends (aka actual money, NOW) – I looked like an absolute fool. But then the tide turned. So now I’m nursing losses of ~20% instead of 44%! So I suppose that’s something to be thankful for!
But no matter how much exposure you do or don’t have to growth, your portfolio is down this year. And what’s made this all so tricky is that bonds (your classic diversifier) have gone gone down right along with stocks. Not much use. hey?
Why finance’s only free lunch hasn’t gone down so well this year!
So you’ll notice how you couldn’t exactly diversify yourself outa this mess. No matter how puffed up your portfolio was with bonds, they were all mostly useless. And UK gilts – which were dubbed ‘super-safe’ have nosedived ~25% this year. Yup, that’s down to the shambles that is UK politics, but still! 25%! Madness.
So anyone who had a diversified portfolio will no doubt have experienced a rollercoaster ride that’s mostly been going on those down, stomach-lurching moves if you know what I mean! Still waiting to get to that high point though I suppose a year ago, we were there. Hence this mad ride down.
Bond bubble bursts as rates rise
Bonds have been in a bubble of their own since the dawn of low interest rates and their price started climbing in the mid-80s which is when yields started coming down (psst: bond prices and bond yields move inversely to each other.) But now as interest are going up, bonds are selling off – sending their yields higher.
The Fed began lifting rates rather aggressively as it came to the (obvious) conclusion that inflation was going to be slightly less than transitory! In its past 3 meetings, the Fed raised rates by 0.75% bringing rates to a whopper 3.25%. Seems like an alternate reality if you ask me. But hey, this is our reality and we’ve gotta get with the programme.
During what’s been a really painful year for investors, there are some glowing lessons that we can all use no matter our stage, age or net worth.
Don’t assume things will continue
The big mistake retail investors made was assuming the golden combo of low rates + high liquidity will continue indefinitely. It’s not just reflected in their investment portfolio but in their home purchases too. Many loaded up on debt (by way of a big mortgage) taking out more than they could actually afford and now that rates are rising, they’re finding their mortgage bill has gone up by 3/4x when remortgaging. (Read here more about that & why you need to stress test your finances now).
No one really knows what the macro scene will look like in 5 years let alone in 5 days! But the big mistake is thinking the past = the future. That’s totally wrong and will land you (and your precious portfolio) in trouble. Instead, make sure you’re investing for a range of potential outcomes which brings me onto my next point:
Diversification – despite this year’s disaster – still matters!
Diversification is that boring old thing we tend to neglect in bull markets! We have a habit of sticking to what does well (cough, cough, US tech) and anyone that was invested in this trend over the past decade has done tremendously well.
To be pretty honest, asset prices in general have been frothing over that period. From real estate to stocks to bonds. But this year has flipped it all on its head. And anyone who had a huge exposure to tech and growth areas in general got really badly burnt. The Nasdaq is down ~31% this year and the S&P 500 is down ~22% this year. Nice one!
Diversification is not just about owning different assets (like stocks and bonds for instance) but it’s also about diversifying within each asset class. Growth stocks are great, I love them (even after this dreadful year) and believe they deserve a place in anyone’s portfolio who has a reasonably long investment horizon! But you’re gonna need more than that.
You not only need to diversify within your growth areas (thinking about size, country and so on) but to diversify into other areas like defensives (think healthcare, utilities and telecoms) and income (financials, energy & mining). A portfolio needs it all, and especially now when the global economic outlook is seriously uncertain. Obviously reward comes from uncertainty – if there was zero uncertainty there’d be little to no reward but it’s also where the risk (and volatility) come from. So be careful that you aren’t overly exposed to any one single area.
Many are saying goodbye to investing
The danger of having -44% returns this year is that it’s causing 21% of millennials and Gen Zers to close their brokerage accounts. To lose almost half of your portfolio totally sucks. It’s painful to lose money that you’ve worked hard for but the old saying of not investing more than afford to lose really holds. If you need access to your money that’s sitting on the stock market in less than 5 years, you should really be holding it elsewhere.
Selling when stocks have crashed, so badly that we’re practically making history, is the single worst time. Bear markets last 289 days (on average) while bull markets last (on average) 991 days. While it feels like the bears linger for so long, look at the contrast between the bulls.
So hang in there. Have faith in the future. It’s bright but we’ve just gotta get through this bear-ish patch. No one really knows how long it’ll last for nor how bad things will get but history is on our side. Markets recover. They always do.
Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.
Knead Your Dough 