Panic, fear, and an emergency 75-basis-point cut in the Fed funds rate. Yes, dear readers, it’s time to start nibbling at asset classes that have fallen on hard times.
But let’s not go crazy. We’re not in the business of calling market bottoms, or tops. Nobody knows how long the selling will last. It could be over tomorrow, unless a protracted bear market extends the pain for months or years.
This much, at least, looks clear: strategic-minded investors with long horizons should be taking advantage of the selling. Timing, of course, will be critical. Alas, there’s no definitive bell-ringing ceremony at the bottom of bear markets. Clarity only arrives with hindsight. Nonetheless, waiting for clarity is sure to come with an opportunity cost. Once it’s obvious that the trough is past, market’s may have already bounced higher.
Overall, the risk of waiting too long to exploit a cyclical repricing of securities is balanced by the risk of pulling the trigger too early. In a perfect world, investors would buy at the bottom and sell at the top. In the universe we all inhabit, however, imprecision rules and so returns suffer relative to the ideal, albeit in varying degrees depending on the investor.
Despite the risk of buying too early or too late, few can afford to stand still and watch the world pass by. Lower prices equate with higher prospective returns. And so, after five straight years of bull markets in just about everything, the cycle has turned, risk has been reshuffled and a new deck of prospective returns has been dealt. We don’t pretend to have the answer as to when it’s time to buy. On the other hand, we’re reasonably sure that the year ahead will offer compelling opportunities for rebalancing among the major asset classes. The source of this new opportunity: the churning of economic and financial risk.