According to a Bank of America ‘financial stress indicator’, which measures market risk, hedging demand and investor flows, market worries are at their lowest level since April 2021. So short-term bullish sentiment aside, does this signal a potential market peak? Should we be concerned that a correction (or worse) might be around the corner?
The short answer is that it depends on your perspective, and whether or not you’re taking a short or long term view. Brokers, managers and day traders, will all take note of the indicator (among many, many other indicators), and adjust their portfolios accordingly, to take advantage of any future volatility - that’s what they do, that’s what we pay them for - to be ‘active’.
On the other hand, if you have a basket of quality assets, paying a predictable flow of income, and you’re also taking a longer-term view, whether or not markets might be at a turning point may be of some interest, but in all likelihood will have little impact on your outlook, and the composition of your portfolio.
This is the difference between an active and a passive portfolio, and despite endless debate over which is superior, I believe there’s room for both approaches - there is no right or wrong answer, both have merit.
That said, if you’re retired, or close to retirement, it’s important to take stock and be honest with yourself. How would you personally feel if your retirement next egg fell 10 or 20 percent within a few days? While you might outwardly dismiss a sizeable correction as merely a ‘swings and roundabouts’ event, something that will eventually recover (after all that’s what your trusted adviser and every market expert has ever told you), would you really be ok with a setback that size (both emotionally and financially)?
It’s perfectly ok to feel uncomfortable, but its important to dig deep sooner rather than later, know the risks you’re truly prepared to accept and and then lay down some clearly defined investment parameters for yourself, and stick to it. Your health and your enjoyment of life are also at stake, so this is worth some serious soul searching.
By the way, as an aside, while you’re in the process of assessing your risks, don’t ignore your super or pension fund - most Australians would be horrified to discover that their reassuringly labelled ‘Balanced’ fund might, right now, have about 80% exposure to riskier growth assets, which doesn’t seem very ‘balanced’ to me.
In short, know one really knows whether markets have peaked, so if we can’t accurately predict or control these investment cycles, knowing where you personally sit on the risk/return spectrum (at any age) is your best defence against downturns and market hysteria, making you a better, calmer investor in the process.
Rick Maggi