Advisor says it's time to re-weight risk in your portfolio
A market correction of 15-25% remains overdue, according to one advisor, as stocks rebounded slightly yesterday after their biggest dip in six and half years.
Major indexes in Asia and Europe fell sharply on Monday, while the Dow Jones Industrial Average dropped 1,150 points as signs of rising inflation and higher interest rates put the heebi jeebies into investors.
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Yesterday, the Dow Jones finished up 2.33% after a wild day, while the S&P 500 was up 1.74% and the NASDAQ was up 2.13%.
Kyle Richie, senior executive consultant, Richie Group Private Wealth Management, said Monday's sell-off frenzy, which wiped out a reported $1.25 trillion from the value of US stocks, is healthy and that it’s time to re-weight risk in your portfolio.
He said: “The last couple of days have been very likely because of fears of interest rate increases and, like everyone’s heard in the news, a good jobs report, but I would say all of this has nothing to do with anything because valuations are not supported by earnings, period.”
He added: “No one knows because this is crystal ball stuff, but it’s likely that before our next major leg-up we have a reasonable correction of between 15-25%, and that’s not abnormal.”
Richie said he has already made his moves and his strategy is unchanged by the volatility. The advisor’s message to clients has been consistent for the past six months – and that’s to take some risk off the table.
He said: “My advice to my clients is the advice I had six months ago: let’s reduce some of the risk because we’ve made a lot of money in the last number of years and it’s time to become a lot more balanced and re-weight risk.
“Generally speaking, you don’t want to sell on generally really big down days but my advice to my clients for more than six months is that we have been reducing our equity exposure significantly, so I’m doing nothing right now. I’m saying this is overdue. I’ve already made my moves.”
Investors have been making so much money in this bull market, says Richie, that the risk tolerance discussed with their advisor four or five years ago is no longer in tune with their portfolio,
He said: “No one cared because everyone is filing and making so much money, so who gives a shit? But really that’s when you should re-evaluate your tolerance for risk – ‘I’ve made a bunch of money, let’s pare it back’.”
Eric Lascelles, chief economist for RBC Global Asset Management agreed that this burst of volatility was overdue after a “weirdly long period” of stability.
He said: “The high level of complacency, optimism and, dare we say, greed lately on display also created a vulnerability.”
The other reason for the sell-off, said Lascelles, was that the bond market had started to respond to the reality of tightening economic conditions, rising inflation and, therefore, the prospect of central banks continuing to remove stimulus.
He said: “The big increase in bond yields over the past few weeks, preceded by steady gains over several months, had started to dim financial conditions. The final straw appears to have been the US payrolls report which revealed strong hiring but also stronger-than-expected wage growth; a negative for corporate income statements, and a hint about the late stage of the business cycle.
“It is unusual for stocks to be down at the same time that bond yields are up - they have risen over the past several weeks, if not the latest few days. A more concerning signal would be if yields declined significantly, too.”
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