Investors are understandably unsure about what, if anything, they should be doing with their portfolios to navigate the current economic landscape; however, pulling out of stocks might not be the right move, especially for long-term investors.
“We had already anticipated volatility given the Fed’s pivot to a more hawkish stance as it prepared to begin tightening monetary policy. However, the situation has become far more complicated in recent weeks,” Kristina Hooper, chief global market strategist at Invesco, wrote. “We need to recognize that Russia’s invasion of Ukraine came as an enormous surprise to markets, and that is reflected in the stock market sell-off as well as some of the speculative activity in commodity prices.”
Hooper said there is more downside and more volatility ahead as markets continue to digest such a dramatic departure from conventional expectations.
Investors need to adjust expectations: The crisis in Ukraine could persist for some time to come, but Hooper said they would expect markets to start to recover as the global economy adjusts.
“Volatility, even intraday, has materially increased for both equities and bonds this year, but we have not seen panic moves and capitulation,” Hooper wrote. “This could be another sign that volatility, linked to the perception of uncertainty, can persist for some time.”
Regardless, Hooper believes this is not a time to abandon stocks if one has a longer-term time horizon, reiterating that this is a time to be well-diversified across and within asset classes.
Opting for an equal-weight index, as opposed to a market cap-weighted approach, can provide diversification benefits and reduce concentration risk by weighting each constituent company equally so that a small group of companies does not have an outsized impact on the index.
With quarterly rebalances to maintain equal weightings, RSP’s methodology imposes a strict “buy low/sell high” discipline, trimming allocations to companies that have grown and increasing allocations to companies that have underperformed, according to Invesco.
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