The concept of long term investing is not new. Although the stock market tends to face chilling downturns for various reasons, history has shown that a recovery does eventually transpire. This however, is not meant to promote a sense of overconfidence. Even though it seems like ‘everything will go up in the long run’, all clients are subject to a time horizon; And with the timing of a downturn and the speed of a recovery left unknown, clients who are at the mature stages of life are still vulnerable to market volatility.
We find it opportune to speak about setting expectations and prudently earmarking a particular segment of one’s investable net worth to long term prospects. With equity indexes recovering sharply, we see investors reach for greater equity exposure and notably more in the technology sector. On the surface this is understandable as technology has become a staple and utility for society and corporate earnings, unlike the previous dotcom bubble, have been tremendous. This has led to soaring gains for everything between "high flying" technology 'unicorns' and the mega cap technology stocks. We still remain confident in the long term upside in some of our favorite technology themes including Cloud, 5G, E-commerce, Artificial Intelligence, Software-as-a-Service and Fintech. However, we also recognize that at certain valuations, companies must execute perfectly and the macro environment must remain conducive to growth. Most importantly, one must recognize that there are macro risks out there that could punish a high growth stock at no fault of their own. These include:
One of the most difficult objectives in investing is to recognize whether all the good news for a stock has already been priced in. To quote Bill Gates, “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten”. This is a good reminder to investors that some of the grand expectations that an investor has for a company may take time to come to fruition. In the meantime, the path may be turbulent.
Recently market watchers have noted that the S&P500 has made all-time highs while the VIX (an indicator of market volatility) has also notched higher readings. Liz Ann Sonders, Chief Investment Strategist of Charles Schwab & Co, points out that 17 out of the 20 occurrences that this has happened was in the late 90s prior to the tech bubble collapse. Of course, the current low rate environment and support from the Fed provides a fundamentally different backdrop from the late 90's; However, it is still seen as a red flag to some investors. Late last week we observed what could be the beginning of a rotation out of high growth stocks into value stocks that have lagged the overall market. That being said, time will tell whether this rotation will last as the post-financial crisis bull market has tended to revert back to growth sectors.
With so much unknown, a prudent approach that involves rebalancing gains should be taken. Moreover, investors should also work with their advisor to reflect on potential concentration risks in particular names or sectors within their portfolio. It could also be worth considering to carve out particular “winning” stocks to a different sleeve of a portfolio that is meant to have lower turnover and a longer time horizon. Although no one has ever gotten hurt by “ringing the register” and taking profits, we recognize it can be hard to trim a winning position. Therefore, we believe setting one’s expectations for volatility and accepting the risks ahead is necessary. Reviewing analyst research and price targets with your advisor can also further help to develop a planned exit strategy.