How to invest when markets can’t be trusted

Stock markets may be booming, but the environment is certainly not worry-free. Geopolitics, stubborn inflation and rising bond yields all pose headwinds to the equity market outlook, and there is ongoing debate about the reliability of earnings numbers being reported at the aggregate index level. Some commentators have even floated the idea that we are in a late-stage bubble. Yet equity markets continue to find new highs.

So what should investors do, amidst this uncertainty?

Trying to time the markets is a notoriously futile exercise. Even if we are in a bubble, markets could well continue to rally higher for several more months. And, even if markets do correct, recovery usually happens on a few key days. Miss those ‘best’ days, and the long-term growth of your portfolio could be severely jeopardised. That’s why the most reliable approach to growing your portfolio in the long term is to remain invested.

In an environment where inflation is likely to remain elevated for longer, ensuring a healthy allocation to growth assets is even more important. Taken together then, the message is clear: ensure your portfolio is structured with the longer-term objective in mind, rather than letting short-term worries dominate your decision-making, and ensure your portfolio is structured appropriately to navigate a challenging environment.

Know the role of every asset as part of your overall portfolio

At PSG Asset Management, we believe it is important to be clear about the role every asset plays in your portfolio. We aim to ensure our portfolios include a broad range of potential return drivers that are not dependent on any single economic or market outcome. This helps to ensure that portfolios are resilient, and able to navigate a wide range of potential scenarios successfully, while remaining well positioned to achieve the long-term investment objective.

Remaining invested should not be confused with doing nothing

A changing market regime requires active portfolio decisions to ensure investments remain well positioned for the opportunities and risks that may lie ahead.

• Check that your portfolio is designed for the next decade, rather than the last one. Strategies that worked well following on the decade of low interest rates since the Global Financial Crisis may be less effective in a higher-inflation, more volatile environment.

• Reduce exposure to areas of the market that have benefited most from past distortions and may be vulnerable to repricing as those imbalances unwind.

• Diversify exposure to include shares which could benefit from a shift in market leadership away from the growth-driven winners of the past decade, like global value shares.

• Incorporate real assets and selective emerging market opportunities to benefit from supply constraints, inflationary pressures and potentially more attractive long-term valuations.

• Ensure portfolios are truly diversified. Developed market bonds may no longer provide the same diversification benefits they offered historically in 60/40 (60% equities, 40% bond, or typical global balanced fund) portfolios. Moreover, high levels of concentration mean that investors can no longer assume that simply copying an index will provide adequate levels of diversification. Given the complex macro and geopolitical backdrop, active and considered portfolio construction is key. 

Ensure your portfolio is designed to navigate a challenging environment

Periods of market volatility typically cause discomfort, but they also create opportunities for patient, long-term investors. We believe a globally integrated, bottom-up approach is well positioned to construct portfolios that can successfully navigate an unpredictable environment, and continue building wealth in the long run, even when the market cannot be trusted.

Lyle Sankar is the Chief Executive Officer at PSG Asset Management.