The market’s recent stumble has most certainly caused investors to shiver. Headlines scream of uncertainty, and the temptation to retreat, to circle the wagons, to defend what remains is profound. What if I told you, in fact, that this downturn is not a cause for alarm. Rather, it’s a wonderful opportunity that’s come a knocking at your door! A once-in-a-generation chance to create some long term wealth by buying quality assets strategically when prices are lower than normal? Perhaps these new market conditions feel a bit scary. For those willing to venture a contrarian view, they present an intriguing opportunity.
As an author and entrepreneur with OverTraders.com who has been deeply entrenched in the financial world, I’ve seen these market cycles come and go. I’ve witnessed panic seize up investors forcing them to act quickly only to take actions they’re not happy with. I’ve watched those who stuck to their guns, who could look past the short-term tumult, enjoy tremendous success. Again, this is not about wild-west risk-taking, but committing to a thoughtful strategy that seizes on temporary dislocations in the market.
The smartest and most important thing I’ve learned is that we have to calibrate our understanding of risk tolerance. It’s not a one-time number either, that changes only once every few years. Recall those early days of the COVID-19 pandemic. That overwhelming fear drove markets into a downward spiral, and even experienced investors wanted to sell everything possible. Those who knew their risk profile going into this situation knew what they wanted long term. Consequently, they were more likely to have the fortitude to stay in their lane.
Risk is another critical consideration to quantify. Other tools such as standard deviation, beta, Value at Risk (VaR), and the Capital Asset Pricing Model (CAPM) provide useful perspectives. They assist us in modeling volatility and predicting returns in a proper manner. Bond rating agencies like Standard and Poor’s, Fitch, and Moody's offer critical assessments of creditworthiness, helping investors navigate the complexities of the fixed income market.
Diversification, of course, goes without saying as a pillar of prudent investment management. It’s how the old saying goes—you can’t put all your eggs in one basket. 4 Diversify your investments Diversification is key—don’t put all your eggs in one basket. This one smart strategy can drastically mitigate your risk. See Private Corporate Lending and Private Real Estate Lending – Much More Income Potential Learn more about distressed credit investing as a source of opportunistic, risk-adjusted growth. Private market investments such as buyouts, growth equity and venture capital can offer enhanced growth potential and diversification benefits. And this is all without considering private real estate and infrastructure, which provide appreciation, tax benefits, and inflation protection. Hedged strategies like our Portfolio Volatility Strategy can play an important role.
Knowing the past patterns and results is important to meaningfully put numbers to risk. This means taking a hard look at prior market corrections and examining the performance of various asset classes and allocation strategies. When stocks tend to fall hardest is during a recession. It’s usually bonds that do the heavy lifting, providing the ballast your portfolio needs during times of volatility. Understanding these trends will allow investors to better position themselves through asset allocation and risk mitigation strategies.
More than the cents and dollars, it’s important to understand the mental side of investing. Behavioral biases are everywhere, and when present they can greatly inhibit the ability to make sound and reasonable decisions. Like flypaper for stupid, investors get stuck pursuing overvalued assets in a classic FOMO response. The prospect of losing money makes them prone to panic selling when the market turns. Social media and online gaming communities can magnify these biases further, creating herd behavior and groupthink. I’ve experienced as much, how the pressure to conform trumps reasonable analysis.
I know from personal experience of the allure of going with the crowd. During the dot-com bubble, the siren call of overnight fortunes was simply too seductive. Instead, I did not dump all my money into the latest hot internet companies. Instead, I went with a safer, diversified strategy. That turned out to be a fortuitous choice when the bubble popped and millions of investors lost their life savings.
On top of that, even in a non-transformational environment, the economic landscape is quickly changing. The increase in income inequality, the concentration of wealth, and racial wealth gaps all have important considerations for investment approaches. Though tremendous strides have been made in the War on Poverty, many still suffer the wounds of economic inequality. Having a better understanding of all these trends can really help you make the best investment decisions and improve social and economic outcomes.
We’re all in a really exciting space and we need to be careful to stay humble and avoid overconfidence. The market is an unyielding and fickle monster, and nobody can know her every curve and corner in advance. So, as a result, I think that I’m always pretty suspicious of different approaches to investing, and always open to learning from, learning what I’m doing wrong and improving.
Now, we know what some of you are thinking—be careful out there, the risk isn’t worth the return. I get where this argument is coming from. We understand that economic uncertainty is very real, and no one can promise future market performance. As history has taught us, those who purchase during the dip are usually handsomely rewarded when the market turns back around.
The silver lining is that the long-term trends are inarguable. We are four months into 2021 and despite this short-term volatility, the generally upward trajectory of the market has continued. Companies are moving into new territories, creating new industries, economies are expanding and human ingenuity is always finding new avenues to create value. When you do that, you’re placing a bet on human progress by investing in quality companies with strong fundamentals.
I believe that this current downturn represents an unprecedented opportunity to finally establish a strong footing for true long-term financial success. It takes vision, gumption, rigor and a deep-seated contrarian spirit. With the right mindset to do the work needed and an appreciation for the risks involved, you can enjoy outsized benefits. Keep grinding, and you will be rewarded with success. Fear can’t stop you from working on this equation. Take advantage of the downturn.
