A senior wealth management executive has recommended investors rebalance their portfolio now in order to minimise their risk and enhance capital protection.
In particular, Talaria Capital co-chief investment officer Chad Padowitz warned against positioning portfolio holdings for a market recovery even though falling share prices might suggest investment opportunities are currently to be had. To this end, Padowitz noted the outlook for markets remains poor.
“We cannot emphasise enough that if the market gives investors another opportunity to rebalance, they should take it. One of the keys to wealth creation is holding on to as much of it as possible in down markets so that capital can then work for you when things improve, as they eventually will,” he said.
He pointed out the current state of valuations should be encouraging individuals to make changes to their portfolio holdings, but are not actually having this effect.
“For example, investors in US equities, the most important global region, are very pessimistic but have done little about it. Shares are at lofty percentages of household wealth. In fact, on some measures S&P 500 valuations have rarely been higher in its long and storied history,” he noted.
He also acknowledged corporate profitability is unlikely to drive long-term returns due to their current uncertainty.
“Whether it is signalled by yield curve inversion, falling leading indicators, spiking unit labour costs or rising interest rates and taxation, near record margins are almost certain to come under pressure,” he said.
“When considering long-run prospective average annual total returns for the S&P 500 over the next decade, we modelled upside, central and downside scenarios. For upside we arrive at nominal annual returns of 6.1 per cent, 3.6 per cent for central and -1.4 per cent for downside.”
With regard to inflation, he suggested investors should expect it to continue to be a significant headwind for markets.
“There are authoritative voices on either side of the argument. If forced to say, we would agree with the persistent inflationists mainly because it is wages that drive services, which is the key constituent of core inflation,” he said.
“But for the purposes of returns, we focus on the risk to earnings, the other claw of the pincer clamped either side of the equity market.”
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