Against a complex global macro environment, thinking about portfolios at the micro level may help investors to keep focused on the long term.
The global economy is at a delicate juncture, with the risk of a recession rising, inflationary pressures, and central banks with their foot on the rate-rise accelerator. Navigating this as an investor can be challenging.
Have we reached the bottom?
With financial markets and sentiment on edge with each major economic data release, all eyes are on how policymakers will best steer the ship.
If such attention is being given to macro news, individual investors may conclude that they too should be taking such data into account when making investment decisions. Questions such as, 'Have we reached the bottom?', 'Where will the market be in six months?', and 'How will the next inflation reading affect the market?' are valid ones to ask. That said, they can lead investors down the path of market timing, which can be a costly and futile endeavour.
The costs of being too informed
Given that over shorter horizons investments are often more volatile, focusing on the short term might make investing seem riskier, which can lead to actions and behaviours which are unhelpful in the long term.
These include the costs of inaction, as investors await certain signals, and attempts to time entry into or exit from markets. The emotional impact of this can also exacerbate behavioural biases, potentially impairing decision-making.
While the idea of paying less attention to the macro environment may feel counterintuitive, we pose a simple question which may help with the exercise – what are you holding in your investment portfolio?
What are you holding?
While much of the discussion is about the market, we remind investors that your portfolio is not ‘the market’. It can be helpful to think about which individual equities you hold. Instead of viewing it as stocks which are highly volatile and subject to swings in sentiment and the macro environment, it could be worth considering what exactly you hold at the micro level.
When your portfolio includes equities, you are holding shares in a selection of individual companies (in a professionally advised or managed portfolio, one would expect these to be better-run individual companies).
While the macro environment is important, as that is the one in which these companies operate, it’s worth remembering that a particularly unfavourable data release will not stop a strong and well-run company overnight from being well-managed (and likewise in the other direction).
The risk for investors during falling markets is a focus on the short term and a feeling of needing to gain exposure to whatever part of the market has the most momentum. This can result in investors selling structural winners only to buy structural losers.