In an article for last month’s ETF.com, BAM Alliance director of research Larry Swedroe offered some insight on how to weather potential market volatility using a balanced view of the current environment.
“While the economic expansion is now 10 years old, expansions don’t die of old age,” writes Swedroe. “They die either because geopolitical risks show up or because the Fed tightens monetary policy, driving real rates to high levels to fight inflation.”
Swedroe argues that current economic data does not indicate that a recession or bear market is imminent, but lists some concerns that are “well known by sophisticated institutional investors” and are therefore setting prices:
- Equity valuations are high;
- “If the low interest rates around the globe suppress U.S. rates, even a 4% intermediate-term Treasury rate could create pressures on stock prices;”
- Trade policy uncertainty;
- “Massive” federal budget deficits;
- Low unemployment rate;
- Geopolitical risks and uncertainty around the 2020 presidential election.
Swedroe highlights his own concerns about investor behavior, including yield-chasing (in response to the low interest-rate environment the Fed created) which, in turn, “led them to abandon the safety of Treasury and CD investments and to the purchase of risk assets.” He offers perspective on the transformation of risk into uncertainty and how that manifests in investor behavior. Swedroe also explains what he sees as a possibility for a “dual” bear market in both equities and bonds.
The article concludes with a section titled “Good Decision-Making,” that emphasizes the importance of preparedness and underscores the following concepts:
- “Being prepared also increases the odds you can act like legendary investor Warren Buffett, keeping your head and buying when others are panic-selling, through the act of rebalancing your portfolio.”
- “Remember, once you sell, it’s difficult or impossible to recover, because you not only have to be right when you sell, you have to be right when you eventually buy back.”
- “Once you panic sell, you’re almost doomed to fail. Which is why it’s so important to have a well-thought-out plan in place.”
- “Before you abandon one strategy in favor of another, make sure you ask yourself if there is any peer-reviewed, published evidence that the new strategy (such as market timing or hiring an active manager) is a superior strategy.”