Ask the Rational Investor: Navigating Today's Markets
Today’s stock market represents an excellent example of how it can be challenging to be a long-term investor. Stock prices seem to keep going up despite geopolitical risk, viruses, inflation, and many other areas of concern.
In these more challenging times to be an investor focus on what you can control.
Investors can control how much risk they are taking in the stock market. For each investor, it might differ from reducing your allocation to stocks or trimming some companies that have appreciated significantly and investing in more stable dividend-paying stocks.
Gradual decisions based on logic will help you achieve your long-term goals. It is likely a mistake to dramatically change your asset allocation because the stock market has been rising for years.
In recent months many industry pundits have focused on inflationary concerns. Historically one of the best methods to mitigate inflation has been investing in high-quality businesses that have durable competitive positions.
A company with a significant scale industry will be able to pass through inflationary pressures due to pricing power with customers. Being a large industry-dominant company will also facilitate negotiating power with suppliers to mitigate cost pressures.
Poorly managed companies with weak balance sheets will do worse than their high-quality peers.
Reviewing your investments and understanding potential areas of risk is a prudent activity in today’s markets. Does your portfolio have a concentration of high-risk growth stocks? If so, perhaps trim the positions and reallocate the proceeds to more stable companies.
In addition to company-specific competitive advantages, certain industry groups will do better handling inflation than others. As an example, Visa and Mastercard charge small transaction fees on every swipe of a debit or credit card. As companies increase prices to offset inflationary pressures the transaction fee Visa and Mastercard will rise due to the higher price of the product.
A meticulous review of your portfolio will increase your comfort level and potentially reduce risk in today’s uncertain environment.
Sources: Factset and company reports
Beese Fulmer Private Wealth Management was founded in 1980 and is one of Stark County’s oldest and largest investment management firms. The company serves high-net-worth individuals, families, and non-profits, and has been ranked as one of the largest money managers in Northeast Ohio.