Stocks and bonds have volatility which is the price we pay for investing in them for potentially higher returns than cash. But sometimes the volatility doesn’t seem to make sense. Many times the stock market will be up big one day, only to drop precipitously the next day. What causes this type of volatility? Sometimes there is legitimate news about a company, industry, or a release of an important economic report but many times there is no big news at all. How much could the economy have changed overnight? Usually, the answer is not much. But it’s important to note that there are different types of investors controlling enormous sums of capital and not all of them have the same objectives as high-net-worth clients. All of the players can affect stock market prices and swings, this goes for the bond market as well. Here is a small breakdown of who’s who in the stock market zoo:
Hedge Funds and Traders: This group wields enormous amounts of capital which is often magnified by debt. They are trying to obtain very high returns in a short time which means they have a high tolerance for risk. Their investment timeline is short, which could mean weeks or even just hours. These “investors” do not care about stock prices, they care about momentum. So if a stock is incredibly expensive, they couldn’t care less because if the momentum is moving the stock higher, they are buying. This group relies on news and they often have a herd mentality which exacerbates the momentum. The people in this group show up to work each day to play high-stakes poker with the markets.
Pension, Annuity, and Insurance Funds: Another investor group is almost the opposite of the hedge funds/traders. They are very long-term focused, often looking out 30, 40, 50+ years. They are very risk-averse but need some amount of return over time. This group is trying to match liabilities such as providing for workers’ monthly pension checks or insurance payouts covering the costs of catastrophic events. They invest in relatively conservative portfolios with safe investments and oftentimes regulations restrict them to buying only the highest-rated securities. The price of assets doesn’t matter much but they do need some level of return, even if it is relatively modest. Ever wonder who was buying all the government bonds that were yielding close to nothing during the 2010s? Yup, it was this group.
Central Banks & Banks: Once again, this group controls huge amounts of capital (they are the banks after all) and their function can range from controlling credit conditions with monetary policy (such as during the pandemic when the U.S. Federal Reserve was buying bonds to keep yields low) to maintaining balance sheets in case loans need to be made or to cover loan losses. Banks have low tolerance to risk and their investing time horizon can vary but it tends to range from medium to long-term.
Family Offices: This is a relatively unique group that can invest in almost any way depending on the family. Mostly, they are trying to preserve wealth, not take too much risk, be opportunistic with investments, and look for good prices, with usually a medium to long-term time horizon. Sometimes the timeline can be for many generations, but once again, it depends on the family’s objectives. Though they are relatively conservative with investing, it is not uncommon for a family office to have a portion of high-risk investments. These could be investments in start-up companies, venture capital firms that have potential outsized returns or they could be investments that speak to the interests or values of the family, such as environment or social. Even though these smaller investments can be higher risk, they usually don’t jeopardize the longer-term portfolio strategy.
High Net Worth (HNW) Investors: Well, who is left after all the groups above? That would be HNW and retail investors. The investment time horizon and risk tolerance depend on the investor though as a group the timeline is usually medium to long-term as funding a 10 – 30 year retirement is a high priority goal. Prices matter to this investor group as they tend to pay fair or reasonable prices for investments. Also, many in this group have concerns about big market downturns, as they can drastically reduce their standard of living during retirement.
I hope this listing of who’s who in the investing zoo can shed light on why markets react the way they do sometimes. For HNW investors, it’s important to have an appropriate investment strategy and asset allocation for your timeline and risk which should help you ignore the rest of the market noise driven by investors with other objectives.
Will The September Effect Arrive Next Month? Historically, stocks have lost 1.1% on average, during September which is the worst return for all months of the year. This is a relatively consistent effect as stocks have only had positive gains during the month 45% of the time going back to 1928. Still, it’s no reason to change your portfolio for one month as we have no idea what will happen. For example, August is generally a good month for stocks but the market is down month to date with a week left. But don’t be surprised if September has a little more volatility that other investors will try to take advantage of and exploit (see above). WSJ
Financial Planning/Investment Strategy Corner:
Be Prepared for Taxes on Savings Accounts, Money Markets, & CDs: After a decade of 0.01% interest yields on CDs, money markets and savings accounts are now as high as 5%+. But you have a partner to split your earnings with – the IRS. When yields were close to zero, taxes were not a worry. Some institutions didn’t even send tax forms for the interest made since it was so small it was “de minimus” and forms were not required to be sent. So be prepared to pay taxes on your interest earned, and before you buy a new CD or roll over a maturing CD into another one, make sure you set aside some funds to pay taxes by April 15th. Just keep in mind, that earning interest is a good thing! 😊 WSJ
Quick Hits:
- Why expanding your palate can increase your longevity: Well + Good
- Marriage matters more than a career when it comes to happiness: NYT Jack Limpert
- A 15-minute daily stretching routine for fitness and flexibility: LifeHack
- The brilliance and generosity of true rural Maine wisdom: Axios
- Let’s not wish the summer away but it’s time to prepare for some beautiful fall activities: Bucket List Journey - The Fall Bucketlist S. News – The 26 Best Fall Festivals in the U.S.
How to Use Different Brain Attention States to Become More Productive: With so many people working from home it is easy to get distracted. New strategies are needed if you can’t close your office door and hunker down. One expert believes everyone has four attention spans which include reactive and distracted (think reactively responding and multitasking); daydreaming to let your mind wander; focused and mindful which is productive work time; and, flow which is difficult to obtain but you are highly focused and fully absorbed in a task. By recognizing which state you are in, you can take steps to move to another. A lot of times, this means controlling your environment such as turning off your phone or finding a quiet space. Daydreaming can be productive if you use it to wander and process information and see where it creatively takes you. By recognizing the different attention states and employing some tactics, you can use them to increase productivity. Fast Company
Quote: “Successful investing is about managing risk, not avoiding it.” Benjamin Graham, who is considered the father of value investing.
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