As the reality of higher interest rates and scarcer capital sinks in, investors are scrambling to adjust. They should focus on these three rules:
end of cheap money. Share prices have been through worse, but only rarely have things been as bloody in so many asset markets at once. Investors find themselves in a new world and they need a new set of rules.500 index of leading American shares was down by almost a quarter at its lowest point this year, erasing more than $10trn in market value. Government bonds, usually a shelter from stocks, have been blasted: Treasuries are heading for their worst year since 1949.
This era of dearer money demands a shift in how investors approach the markets. As reality sinks in, they are scrambling to adjust to the new rules. They should focus on three. However, as Warren Buffett once argued, prospective investors should rejoice when stock prices fall; only those who plan to sell soon should be happy with high prices. Nervous or illiquid investors will sell at the bottom, but they will regret it. Those with the skill, nerve and capital will take advantage of the higher expected returns and thrive.
The third rule is that investment strategies will change. One popular approach since the 2010s has blended passive index investing in public markets with active investing in private ones. This saw vast amounts of money flow into private credit, which was worth over $1trn at its peak. Roughly a fifth of the portfolios of American publicwere in private equity and property. Private-equity deals made up about 20% of all mergers and acquisitions by value.
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