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With $7 trillion in money market funds, many investors are on the sidelines amid a massive stock market rally.
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Fears of a recession and Fed rate hikes have kept many from buying stocks over the past year.
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Investors must embrace volatility if they want long-term success, says John Lloyd of Janus Henderson.
It’s been almost a year since the Federal Reserve made its last rate hike on July 27, 2023, and with a record $7 trillion in money market funds, it’s safe to say that a good chunk of investors missed the stock market. rallied ever since.
Recession fears and uncertainty surrounding the Fed’s fastest monetary tightening regime in history left many investors fearful of a repeat of the bear market in 2022.
Still, the S&P 500 is up 17% since then and the bull rally has extended to a 54% gain since the October 2022 low.
If you missed most of the stock market rally, there are two things you can do to increase your chances of success going forward, according to a recent note from Janus Henderson portfolio manager John Lloyd.
Embrace the volatility
To be a successful investor, you must accept a healthy dose of risk, uncertainty, and downright pain as stocks swing from profit to loss.
One of the biggest mistakes an investor can make is tinkering with their investment allocation as a knee-jerk reaction to the ups and downs of the stock market, rather than sticking to a long-term plan.
That’s why if you missed the stock market rally, it’s crucial to embrace the uncertainty.
“The future is inherently unknowable, and even if you could correctly predict what will happen, it remains unclear how and when it will happen. Therefore, it is necessary to make peace with the reality that the coming year could be a good year, a good year. bad year, or something in between,” Lloyd said.
Moreover, sitting on the sidelines of cash puts a huge strain on investor psychology, and it could cause even more problems down the road.
“Sitting on the sidelines puts investors in a position where they are frustrated by good news and may even hope for bad news so that the markets will fall. In this way, they are similar to farmers who have decided not to plant in the hope that a severe drought will occur. “This inverse incentive system can be extremely taxing on an investor’s psyche, as every hiccup in the market makes someone question their position,” Lloyd said.
So if you’re still sitting on cash and not investing, hoping to put your money to work during the next stock market decline, Lloyd suggests adjusting your mindset to “face the uncertainty of the future.” to embrace’.
“They can take action by reviewing their financial objectives with their financial professional and seeking to rebalance their target asset allocation so that it is aligned with their long-term objectives,” Lloyd said.
Buy assets that have not appreciated
Just because the S&P 500 has risen sharply over the past year doesn’t mean there aren’t still great bargains out there.
Lloyd highlighted US fixed income as an asset class that is still suffering from a painful bear market and has yet to recover due to high interest rates.
That means bonds could see a big rally if rates start to fall.
“We believe the conditions for bond outperformance are firmly in place and interest rates have not yet moved accordingly, creating an opportunity for investors,” Lloyd said.
The Fed is expected to start cutting rates in September.
“At any given time, the future can look bright and hopeful or dark and ominous. It can even look like all of these things at once, just to different people. Regardless of their personal outlook, we believe investors should accept that the future is unknowable and yet remain committed to their investment journey,” concludes Lloyd.
Read the original article on Business Insider
