M&A Investor Insights (Part 2 of 5): Context and Reason, not Fear and Greed!
History repeatedly illustrates that both excessive gains and excessive losses in most balanced portfolios return to a normalized state after some period. Rebalancing tends to happen naturally. I refer to this as a Fear and Greed Index. The pendulum swings to both extremes from time to time but tends to snap back to a more neutral position when conditions become too extreme. Right now, we’re at an elevated fear level. Not to long ago we were at an elevated greed level. At some point we’ll find some middle ground… at least for a while. 😊
Real estate and stock markets have experienced dramatic portfolio growth over the past decade and especially in the last three years, despite the onset of the global pandemic which shocked the world to its core. Many folks have seen the approximate doubling of their residential home values, and similar returns have been seen in the stock markets, depending upon one’s risk tolerance and investment choices.
During these times of exceedingly strong growth, we have often discussed the notion that all the extra growth we’ve seen would be a “down payment for the future”, when the markets would return some of their excesses. The challenge for us is that we are never certain what will trigger such market downturns or how significant the downturn might be. This is what makes “timing” the market (trying to guess the best times to sell and buy) exceedingly difficult in the short term and near impossible to perform accurately over the long term. We do know, however, that if we have some extra “padding” of value from large growth in recent years, we are far better off when we enter a period of market declines.