What a nightmare – markets all fell sharply and everyone panicked about volatility because it was supposed to be low and the billboards screamed “Trillions wiped off share prices”. Thankfully, we all woke up this week to find markets pretty much back where they were and volatility back down to nearer where it should be. Except, of course, it wasn’t a bad dream. It happened and let’s hope it has brought a healthy dose of reality to markets.
In the same way that the pull back came as no surprise to us, nor did the scale and speed of the rebound. This is precisely why we had warned that this correction was coming, and why we had warned against jumping out of the market and then trying to jump in again at the bottom. Those that rode through it had some decidedly anxious moments but have come through largely unscathed.
So what does the future hold for us? We think it would be naïve to assume all of our troubles are behind us. There was undoubtedly a degree of complacency amongst some before the fall so let’s not fall into that trap. Our optimistic view of the medium term outlook for equities remains unchanged. However, our expectation that returns are likely to be lower than in recent years is also unchanged. As is our view that the risk of sharp moves in either direction remain on the table.
So lower expected returns and higher prospective risks. That is the reality of equity investment at this stage of the cycle. It calls for an ‘eyes-wide-open’ approach. Understand what you are doing and why. And, above all else, do not take on more risk than you are comfortable with.
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