Instead of reacting emotionally to headlines, he says the first step after an unexpected event is to “triage your risk,” so you’re not just considering the initial impacts, like a spike in oil prices, but downstream effects.
“If this gets worse,” he says, “which of my companies are most at risk, most exposed to this?”
Some unusual market outcomes at present are being driven by investors rushing from one fashionable sector to another.
“On the face of it, the S&P 500’s fairly flat, but you’ve seen extreme dispersion going on,” Dickie told The Prosperity Project. “Energy stocks are up about 25% year to date and software stocks are down 20 – so a 45% spread in big sectors is extremely unusual.”
Sam Dickie is a senior portfolio manager at Fisher Funds.
Money has been pouring into companies seen as crucial to artificial intelligence infrastructure. “Everyone’s rushing into memory stocks,” he says, pointing to manufacturers such as Samsung, Micron and SK Hynix.
Crowded trades can unwind quickly however, to devastating effect.
“If you look at the Korean stock market, about 45% of the stock market is two stocks – Samsung and Hynix – that’s down 21% in two days,” Dickie says. “You do not see stock markets fall 21% in two days.”
“These things [fashionable sectors] change every few months,” Dickie says. “It’s very aggressive and it’s very concentrated investing – which is very risky.”
The same dynamic can apply to traditional ‘safe haven’ assets, like gold – which hit fresh record highs above US$5000 an ounce earlier this year.
“If you’re being told about gold by the shoeshine person, chances are it won’t behave like it normally would in a safe-haven washout,” Dickie says.
History can offer context for investors, but it often doesn’t provide reliable trading signals.
Dickie points to the 2016 election of Donald Trump. Markets had widely predicted he wouldn’t win, and if he did, that it would be negative for stocks. Instead, the S&P 500 rallied about 20% the following year.
“Even if you’d had tomorrow’s newspaper yesterday, you still wouldn’t have made any money out of it,” he says.
Watch or listen to the full episode of The Prosperity Project for more.
The Prosperity Project is hosted by Nadine Higgins, an experienced broadcaster and financial adviser.
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