As the era of “cheap” money ends in 2023, investors must navigate a vastly different financial landscape. The urgency increases as we see share prices suffering severely, with asset markets all over the globe experiencing deep losses. To successfully cope with this new world, investors must understand and abide by a different set of guidelines.
After all, the current inflationary environment requires a new approach to investing. To help with the many investors struggling to adjust, here are three fundamental rules and strategies that should always stay within your focus.
The first is to remember that future yields will be greater. During the booming period of the 2010s, interest rates were lowered, and expected revenues were turned into capital profits as the drawback of higher prices was lower forecasted returns. By that same logic, this year’s losses will also present a positive side: upcoming actual earnings will go up.
Additionally, a steep drop in asset prices does not necessarily indicate that it cannot fall further. With anticipation building for the Fed’s decisions on interest rates, markets could be more stable. If the US were to enter a recession, businesses around the globe would suffer tremendous losses, and investors may shy away from riskier options, resulting in a decline in share prices.
However, Warren Buffett says that dropping stock prices should be seen as an opportunity, not a source of concern. Investors can find bargains during a dip, so those with the knowledge, courage and capital should take advantage of the increased gain potential. Be savvy and intelligent about what you hold, and refrain from making impulsive selling decisions.
This brings us to the second rule, which is how speculators’ timeframes have shortened. Higher interest rates are inducing investors to be impulsive, and this has affected the share prices of companies like tech start-ups.
Although only some new companies shall be deprived of financing, available cash will be on a tighter budget, and those issuing checks may do so with greater caution. Financiers will need more endurance for companies that require substantial investments initially, with dwindling returns far off into the future.
Business models will acquire fresh impetus as the balance of power changes towards seasoned companies with a clear advantage, as previous investments can give them access to money flows.
The third strategy is to stay ahead with development in investment tactics and rebalance your portfolio when necessary. Well-used since the 2010s, one popular example, is to conduct passive index investing in public markets while actively trading and investing in private ones. While this strategy may seem vulnerable, critics and industry insiders have been quite supportive. Index investing also remains an enduring and cheap option for many investors to gain an average market return with minimal long-term losses.
However, as the number of private companies grows, more investors seek to acquire ownership. Besides purchasing shares from public exchanges, investors can also take advantage of various structures like convertible notes and SAFEs (simple agreement for future equity). These investment tools offer more significant returns than index investing since they allow investors to acquire shares at discounted prices and provide early access to companies yet to debut on the public markets. Ultimately, diversifying your portfolio is always a good way to keep an eye on burgeoning opportunities and balance out losses.
Besides these three strategies, here are other things to note that can help you protect your capital and maximise resources.
Close examination should be warranted when it comes to high-cost private investments. As private fund assets are not traded, managers have significant authority over the value ascribed; and are notorious for delaying any decrease in their asset value. This could result in adverse consequences for investors as they may pay more for a portfolio worth much less. In any case, investors will experience the value drop soon, and speculators in private assets who thought they had stayed away from the dive will also find it hard to remain completely unscathed.
With all these in mind, investors should seek to be versatile in their approach and be accustomed to higher interest rates and more restricted capital. Of course, this will be a challenging feat. However, the long-term perspective must remain a priority as this “new normal” is actually backed by history and is expected to stay for a long time to come.