If the market has already priced in all the bad news, then why on earth are shares still falling? Amusingly, there is no shortage of commentators who claim that the market has accounted for the rate hikes by central banks, that the market knows all about the impact of quantitative tightening, and that they also know about the direction of travel as far as inflation is concerned.
So, why, I ask again, do markets fall when central banks announce their interest-rate decisions? The simple answer is that “talking heads” are talking through their hats, or perhaps some other part of their body that a family-friendly website like The Smart investor is too polite to mention.
Commentators might like us to think that they know everything. But they don’t have a clue. What we do know, however, is that the global economic growth could slow appreciably. It will slow because central banks (apart from a few misguided ones) are doing everything in their power to pump on the brakes of growth as hard as they can. The slowdown won’t be pleasant. Asset prices will fall simply because they have to.
So, what should investors do? In times like these, it is important to make money, save money and grow money. In fact, that has always been my mantra.
In terms of the first, portfolios should be constructed to deliver reliable cash in both good times as well as bad. In terms of the second, portfolios should be low cost and low maintenance. Don’t chop and change shares. It helps to reduce trading expenses, enormously.
In terms of the third, plough back into portfolios any available cash to buy more income-generating shares. That will help ensure that the payout can grow over time. What we want to ensure is that each year’s payout is higher than the income generated in previous year. Some might call it strategic asset allocation. Some might call it tactical asset allocation. I just call it common sense.
I think we can safely say that the next couple of years could be tough, especially when we see our household balance sheets come under pressure as asset prices drop. The wealth effect that many enjoyed could evaporate as quickly as it appeared. But there are few things more reassuring in difficult times than the sound of cash hitting our bank accounts. So, make money, save money and grow money.
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