Ways to invest in an uncertain market environment
If your portfolio is down less than 16% in 2022, you’re beating the S&P 500. Congrats. FWIW, if your portfolio is down less than 44%, you’re beating one of the top hedge funds in the world.
It’s been tough for all types of investors, even for Tiger Global — one of the top-performing hedge funds — down 44% in 2022.
Why are markets falling this time?
Since the brief rally after the Fed’s meeting last week, the S&P 500 is down over 7% — spooked by rising yields and the Fed’s post-meeting comments.
Yesterday, markets fell again over data showing China’s slowing export growth — bringing the S&P 500 to a new low in 2022:
- Shanghai, one of China’s trade and manufacturing hubs, has been under strict lockdowns for the past five weeks.
- In April, Chinese export growth slowed to 3.9% — the lowest level since June 2020 — raising global growth concerns.
Just more bad news for a stressed global supply chain and its implications on inflation.
Despite falling 16%+ in 2022, the S&P 500 still isn’t cheap. Per WSJ, the forward price-to-earnings ratio of the S&P 500 is trading below its 5-year average — but above the 10-year average.
Is cash really king?
During a bear market, one of the most common tactics is moving towards cash — but here’s why that might not work out as intended:
- Per Michael Fritzell of Asian Century Stocks, investors should raise cash positions when the market reaches “euphoria” status.
- With the S&P 500 down 16%+ from its peak — we’re well past this stage — and the move towards cash may be a difficult decision to make.
Fritzell points out a well-known quote by legendary investor Peter Lynch — which says timing the market can also lead to failure. Per Lynch, investors have lost more money preparing for or anticipating a correction than simply holding out.
If going 100% into cash isn’t the best option — what’s the alternative?
Investors: The best defense is a good diversification
Analysts are calling for a bounce as market sentiments reached lows in recent weeks. In contrast, others are expecting an outright market crash. What’s an investor to do?
- Per notable investor Lyn Alden’s May update, diversification and rebalancing are the easiest ways to navigate uncertain market environments.
- Alden recommends a mix of stocks, real estate, cash/bonds, commodities and hard monies (i.e., currency backed by commodities.) Dividend stocks made up nearly a quarter of her portfolio.
One good thing in a bear market — they’re typically “quicker than bull markets,” per Bank of America (Insider).