The Federal Reserve’s expected move today to raise interest rates is spooking investors into doing what they should be doing already: ensuring their portfolios are properly diversified – and this is a good thing.
This assessment comes as markets wait for the U.S. central bank’s announcement on Wednesday at which they could signal the first lift-off in U.S. interest rates since 2018 as they seek to tackle hot-running inflation.
Today is the day. Investors around the world have been prepping for the Fed’s big decision since the beginning of the year, which, in turn, has sparked bouts of volatility in global stock markets.
We saw this turbulence on Monday with one of the most remarkable Wall Street rebounds on record. It was the first time since the fallout of the 2008 financial crisis that the Nasdaq had been down more than 4% on the session and closed up. It was a similar story on the Dow Jones index.
While higher interest rates increase borrowing costs for all businesses, they also make firms’ projected profits worth less in investors’ valuation models. This is exacerbated for tech and other growth stocks whose peak earnings are not expected for years to come.
As such, investors are now more eager to reconsider the value sectors of energy, industrials, materials and financials, and increase their exposure to them.
Some of the tech and growth stocks’ valuations are simply too high and it doesn’t make sense to be over-exposed.
However, sensibly, they will not be dumping all growth stocks. They will also be aware that the pandemic has led to the advancement of fundamental trends, such as online shopping, remote working and gaming.
In short the Fed’s expected move on interest rates is is spooking investors into doing what they should be doing already: ensuring their portfolios are properly diversified.
This is a good thing.
A diversified portfolio is a collection of different investments that combine to reduce an investor's overall risk profile. Diversification includes owning stocks from several different industries, regions, and risk profiles, as well as other investments such as bonds, commodities, currencies and real estate.
As ever, the best way to mitigate risk and position yourself for opportunities is to be diversified.
The Fed is delivering a high-pitched wake-up call to investors around the world about financial history: review your portfolio regularly, remain diversified and don’t try and ‘time the market’.
Nigel Green is the CEO of the deVere Group
BUSINESS REPORT