With $7 trillion in money market funds, many investors have been on the sidelines amid a massive stock rally. Fears of a recession and Fed rate hikes kept many from buying stocks over the past year. However, according to John Lloyd of Janus Henderson, investors need to embrace volatility if they want to succeed in the long-term.
It’s been almost a year since the Federal Reserve made its last interest rate hike on July 27, 2023, and with a record $7 trillion sitting in money market funds, it’s safe to say that a good chunk of investors have missed out on the stock market rally since then. Fears of a recession and uncertainty surrounding the Fed’s fastest monetary tightening regime in history kept many investors fearful about the potential for a repeat of the 2022 bear market.
Yet, the S&P 500 is up 17% since then, and its bull rally has extended to a 54% gain since the October 2022 low. If you’ve missed the bulk of the stock market rally, there are two things you can do to improve your chances of success going forward, according to a recent note from Janus Henderson portfolio manager John Lloyd.
Embrace volatility
To be a successful investor, accept a healthy dose of risk, uncertainty, and outright pain as stocks seesaw from gains to losses. 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 out on the stock market rally, going forward it’s crucial to embrace the uncertainty.
“The future is inherently unknowable, and even if one could correctly predict what will happen, knowing how or when it will happen remains obscure. That’s why it is necessary to make peace with the reality that the upcoming year might be a good year, a bad year, or something in between,” Lloyd said.
What’s more, sitting in cash on the sidelines is incredibly taxing on investor psychology, and it could create more problems down the road. “Sitting on the sidelines places investors in a position where they are frustrated by good news, and might even hope for bad news so markets will decline. In this way they are like farmers who have decided not to plant hoping for a severe drought to prove themselves right. This upside-down incentive system can be extremely taxing on an investor’s psyche, as each blip in the market makes one agonize over one’s 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 “embrace the uncertainty of the future.”
“They can take action by reviewing their financial goals with their financial professional and seeking to rebalance their target asset allocation to align with their long-term goals,” Lloyd said.
Buy assets that haven’t rallied
Just because the S&P 500 has surged over the past year doesn’t mean that there aren’t great bargains still out there. Lloyd highlighted core US fixed income as an asset class still suffering from a painful bear market and has yet to recover due to elevated interest rates. That means bonds can see a big rally if and when interest rates begin to fall.
“In our view, the conditions for bonds to outperform are firmly in place and rates have not yet moved to reflect that, creating opportunity for investors,” Lloyd said. The Fed is expected to begin cutting interest rates in September.
“At any given time, the future may look bright and hopeful or dark and ominous. It might even look like all those 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 investing journey,” Lloyd concluded.
