When the market dropped in March of 2020, many equity investors ran for cover to the bond markets. While the bond rates were low, the thought was that it was better to get a low yield on bond investments rather than lose money from decreased equity prices.
The equity markets took off from the lows of March 2020 and posted some of the best gains of the current bull market. At the same time, interest rates have moved significantly higher. The result is that many investors are now moving back into equities.
The problems with these money movements is that they are working against investors.
Moving to bonds in March 2020 took those investors out of equities right before equities rallied. In the meantime, bond holders held low yielding securities. With the recent rise in interest rates, those bond holders likely lost capital value as their bond prices adjusted to higher rates. When yields are very low and interest rates move up, bond prices adjust more severely than when yields are high and interest rates move up. So now investors are scrambling back into the equities markets.
Jumping back into equities markets at the current high levels seems much more risky. Is this setting them up for loses? While I don’t claim to own a crystal ball, I do believe it is a time to proceed with a high level of caution.
Moving investments around a lot isn’t an approach I follow. When people advocate things like sector rotations and macroeconomic adjustments, I cringe! Not only does the timing have to be good, but Uncle Sam gets to take his cut of any gains. Then, there is less money to invest in the next step. That is, if there are gains.
Buying quality stocks and holding them for the long term is the best way to go. You don’t pay Uncle Sam until you cash out and this reduces drag on returns. Switching back and forth also opens up a significant chances of mistiming the markets. The more switching, the higher the chances of bad events working against the investor.
Be smart, be well-read, be aware and be successful.
