Dynamic Market Changes Mean Fundamental Difference in Investment Strategy

The investment conditions of the market are in the process of a major change, both in terms of risk character and the type of investments that are most likely to provide positive returns. While this market change has been coming for a few years, it appears to have become more evident and near-term based on the market’s volatility during 2018.  

With the increase in equity prices and valuations of growth stocks, price/earnings ratios have approached a level that is not likely sustainable unless earnings can continue to grow as fast as stock prices increase.

Of equal concern is the status of the bond market. Bond yields have been reducing over a number of years, and more recently have ebbed and begun to rise. (As bond yields fall, the value of bonds tends to increase and as bond yields increase, bond values tend to fall.) As both long and short-term bond yields rise, investors should expect to see the value of the bonds they own adjust in price with each bond rates increase.   

There is another dynamic change going on involving what type of securities are being bought and sold. There is generally a wide-spread sale of actively managed mutual funds in favor of index funds and exchange traded funds (ETFs). This changeover from actively managed mutual fund shares (with the 1% to 2% internal operating cost expense charged by most actively traded funds) to index funds or ETFs with their minuscule fee structure, is wise from a cost standpoint. However, such securities are passively invested in a fixed group of securities that are capitalized weighted and at any time may be out of favor under any particular market conditions.

Given these factors, how might investors change their portfolios more effectively? There are better alternatives for the equity and fixed income investment strategies. We recognize and acknowledge the need for a fundamental and strategic change-over in our client’s portfolios and are in the process of doing so. If you would like specific information as it applies to your portfolio, please contact us at advisor@stjohnfinancial.com.

• By Richard St. John, Founder & President