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Many investors holding $7 trillion in money market funds have been on the sidelines amid the massive rise in stock prices.
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Fears of a recession and the Fed raising interest rates have led many to hold off on stock purchases over the past year.
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According to Janus Henderson’s John Lloyd, investors need to embrace volatility if they want to be successful in the long term.
It’s been almost a year since the Federal Reserve last raised interest rates on July 27, 2023, and with a record $7 trillion sitting in money market funds, it’s fair to say a significant number of investors have missed out on the stock market rally since then.
Fears of a recession and uncertainty surrounding the Fed’s fastest-ever monetary tightening regime continue to have many investors fearing a repeat of the bear market in 2022.
But the S&P 500 has risen 17% since then, extending the bull market to a 54% gain from the October 2022 low.
If you missed out on a big chunk of the stock market’s rally, there are two things you can do to improve your chances of future success, according to a recent note from Janus Henderson portfolio manager John Lloyd.
Embrace change
To be a successful investor, you need to be willing to accept a moderate amount of risk, uncertainty, and pain as stock prices go from up to down.
One of the biggest mistakes investors 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 out on the stock market rally, it’s important to embrace uncertainty going forward.
“The future is inherently unpredictable and even if we could accurately predict what will happen, we don’t know when or how it will happen, so we need to accept the reality that next year could be good, bad or somewhere in between,” Lloyd said.
Moreover, having cash on the sidelines can be very taxing on investor sentiment, which could lead to further problems down the line.
“Sitting on the sidelines puts investors in a position where they get frustrated by good news and expect bad news, leading to a market decline. They thus become like farmers who decide not to sow in the hope that a severe drought will prove them right. This inverted incentive system can be very taxing on investors’ psyches, as they find themselves wondering where they stand after every market swing,” Lloyd said.
So if you’re still sitting on cash but not investing, and want to put it to good use during the next stock market downturn, Lloyd suggests shifting your mindset to “embrace the uncertainty of the future”.
“They can take action by reviewing their financial goals with a financial professional and rebalancing their target asset allocation to align with their long-term goals,” Lloyd said.
Buying assets that aren’t rising
Just because the S&P 500 has soared over the past year doesn’t mean there aren’t still some good buys out there.
Lloyd stressed that core U.S. bonds remain in the grip of a painful bear market and are an asset class that has not recovered from rising interest rates.
That means bonds could see big gains if interest rates start to fall.
“In our view, the conditions are very good for bonds to outperform and rates have not yet moved to reflect that, creating an opportunity for investors,” Lloyd said.
The Federal Reserve is expected to start cutting interest rates in September.
“At any given time, the future may look bright and hopeful, or dark and ominous – or all at the same time, depending on the individual. Regardless of individual views, we believe investors should accept that the future is unpredictable and remain fully committed to their investment journey,” Lloyd concluded.
Read the original article on Business Insider
