A wide range of risks could negatively affect the stock market’s future performance. For example, geopolitical risks in Europe remain elevated. Meanwhile, inflation is still at its highest level in many years, which means further interest rate increases could be ahead that lead to slowing economic growth.
Therefore, it is easy for investors to deduce the future is bleak for equity markets. However, this could be somewhat inaccurate. Certainly, further stock market declines cannot be ruled out over the short run, but risks to its performance are omnipresent. Indeed, many of its largest drops have previously taken place without any prior warning. The difference today is that investors appear to be more conscious of, not to mention worried about, the existence of risks than they were several months ago.
Risks do not always materialize
Furthermore, risks do not always come to fruition. Sometimes, investors can be concerned about a potential future event that never takes place. For example, at the present time, many investors are worried about rising interest rates and their impact on equity markets. But with commodity prices having fallen, inflation could prove to be a less severe problem than is currently perceived. This may mean interest rate increases are less severe than is currently being anticipated by market participants.
This viewpoint has previously been discussed by Howard Marks (Trades, Portfolio). The Oaktree Capital founder once said, “Risk means more things can happen than will happen.”
Investors who assume all risks will go on to affect their portfolio’s performance could become overly downbeat about the stock market’s outlook. This may prompt them to avoid buying stocks at opportune moments when their valuations already price in the prospect of poor investment performance. It may even lead them to sell stocks after they have already fallen in price.
An upbeat attitude
In my opinion, investors who have a positive outlook on the stock market are likely to outperform their more bearish peers. After all, the S&P 500 has generated an annualized total return of over 10% in the past 30 years. Certainly, it has experienced numerous bear markets and downturns in that time, but it has always recovered from even its toughest periods that contained heightened risks.
In the meantime, any known or unknown event could have a detrimental impact on the stock market. Indeed, the coming months could exhibit continued volatility after a tough year-to-date performance. But such periods also present opportunities to buy high-quality companies at low prices. In the long run, they could offer the most attractive returns for investors.
Therefore, rather than worrying about risks, I strongly feel investors should use them to purchase companies that are likely to survive short-term challenges to capitalize on improving operating conditions in the coming years.
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