This article has been written by an expert contributor, Kerry Craig, Global Market Strategist, J.P. Morgan Asset Management. Links in the article have been added by Equity Mates Media.
I am confident I can buy low and sell high – am I right?
The rise of meme stocks and low-cost investment apps have invigorated interest in the stock market and the notion that it’s an easy path to wealth. But often jumping on the ‘hottest’ stock and betting that momentum will carry it higher fails as a strategy given how quickly sentiment can turn. A few may win from this strategy, but it might not be the case for everyone.
As a retail investor, stock-picking is a real challenge for one simple reason. There are many people doing it, and they are all pretty good. The bulk of trading in markets is done by professionals and nearly everyone has the same information, this is known as an efficient market. This doesn’t mean that the price is right or wrong, but that no one has any other information to tell them if the price is too high or too low, now or tomorrow.
Investors who wish to be active in the markets without picking stocks can do so by having over/underweights towards equities and bonds, or cyclical and defensive sectors. That may be a greater determinant of overall returns, rather than trying to pick the underlying securities.
Not to mention that trying to time the market could mean higher costs through trading fees that detract from returns, as well as the tax consequences of constant buying and selling.
As the saying goes, it’s about time in the market, not timing the market.
Tech and growth stocks have down so well for so long, why would I invest in anything else?
The technology sector and growth stocks have performed well for several years. One contributing factor is that these companies look more attractive to own when rates are low. Owning a stock, means you own a little piece of the future expected earnings. When interest rates are low, the present value of these future earnings are higher, and investors are willing to pay more for them pushing up valuations and overall returns.
However, the reverse is also true. As rates rise, these types of companies will face falling valuations which will detract from returns. Investors should be cautious of chasing the momentum behind any one stock and paying too much for the promise of earnings. Especially as the more you pay for a company now, the lower the return might be in the long run.
One way of determining the value of a company is looking at how much each dollar of future earnings cost. This is called the price-to-earnings (P/E) ratio. The big technology and consumer service companies are among the top 10 biggest stocks in the U.S. equity market are much more expensive when compared to the broader equity market (Exhibit 1).1
Can I can become a millionaire overnight (through digital assets)?
Digital assets like crypto currencies and NFTs can be appealing to many given the potential for large gains fast. But anyone investing in these assets should be prepared for large losses as well. The price of Bitcoin close to doubled in the three months to April 2021, and then erased those gains in the following three months (Exhibit 2)2.
These types of assets are highly volatile, far more volatile than equity markets because they are often driven by sentiment and momentum rather than underlying fundamental factors. While they may grow to play a more prominent role in portfolios, so far, they are an unproven asset that has inconsistent behaviour in both risk-on and risk-off environments.
To maximise long run returns and achieve investment objectives, we believe investors should have a well thought out investment plan that will allow them to consistently build wealth in any market environment. Formula One teams don’t win a race by going all out to set the fastest lap, doing so they risk crashing and not finishing at all. They win through consistent performance on every lap and keeping to the strategy from the start of the race. Consistency is key.
Key factors for consideration?
Investing is not gambling. Gambling has odds and contains a degree of luck. Investing requires discipline and making well informed investment decisions that lead to the creation of wealth.
- As a younger investor with a greater propensity to take risk consider a foundation to your portfolio via a broader equity index style fund, which can be complemented with select individual holdings to minimise concentration risk.
- Be disciplined in investing by establishing a regular contribution to your portfolio, minimising the risk making the wrong market timing decision.
- Given the vast investment options available, based on your investment objectives and risk appetite, consider aligning your interest to your investments, for example thematic funds such as technology or sustainable investing.
For more from the author, Kerry Craig, check out our episode with Kerry on the Equity Mates Investing Podcast on 21/07/22. Expert: Kerry Craig – J.P. Morgan Asset Management – State of global markets and what it means for investors
Part 1 of this series is available here: Investment questions for all stages of investing: Part 1 – ‘The Newbie’
Part 2 of this series is available here: Investment questions for all stages of investing: Part 2 – ‘The Cautious Investor’
Kerry is responsible for communicating the latest market and economic views from J.P. Morgan Asset Management’s Global Market Insights Strategy Team. With more than 10 years’ experience, Kerry provides valuable insights and perspectives on the economy and markets to investors. As a frequent commentator on Bloomberg, CNBC, the AFR and the wider financial press, Kerry is able to explain complex economic and market issues in a language that investors understand.
Sources:
1: FactSet, Standard & Poor’s, JPMAM. The top 10 S&P 500 companies are based on the 10 largest index constituents at the beginning of each month. The weight of each of these companies is revised monthly. As of 3/31/2022, the top 10 companies in the index were AAPL (7.1%), MSFT (6.0%), AMZN (3.7%), TSLA (2.4), GOGGL (2.2%), NVDA (1.8%), BRK.B (1.7%), FB (1.7%), UNH (1.3%) and JNJ (1.2%). Investments involve risks and are not similar or comparable to deposits. Not all investments are suitable for all investors
2: Coinbase, FactSet, Standard & Poor’s, JPMAM. *Equal weighted basket of Ethereum, Litecoin and Bitcoin Cash. Past performance is not a reliable indicator of current and future results. Guide to the Markets – Australia. Data as of 31 March 2022.