Q: My question is: How does one decide it is time to re-evaluate and take steps to reduce market exposure? This is unique to each investor I believe.
The Substack link provided in response to Sandra’s recent post mentions the importance of institutions in the proper functioning of modern capital markets.
It states:
“ What matters is the health of the institutions that underpin economic predictability.
The institutional failures with the clearest financial relevance are well documented:
1)Erosion of judicial independence and contract enforcement
2)Politicization of regulatory agencies and central banks
3)Suppression or distortion of economically relevant information
4)Concentration of discretionary power in the executive without meaningful legislative or judicial constraint
5)Arbitrary property reallocation or expropriation and
6)Absence of durable mechanisms for accountability or peaceful policy reversal. “
In my opinion, every one of the listed“institutional failures” has happened to some degree.
As such I’m reconsidering my exposure to the equity and bond markets at this time.
Yes, corporate profits look good.
Yes, interest rates have fallen.
But the reality is markets need robust and stable institutions and these are currently facing great risks. Not to be dramatic, but these are the fundamental underpinnings of modern capital markets that are shifting. I’ve never experienced a massive drawdown.
I realise time in the market is what matters, but I’d rather miss some returns than weather the shock of a 10 or 20 point drop (or more). I think I have answered my own question: Things have changed for me (my view of the current stability of the institutional landscape) while my equity exposure has steadily increased. Yes, emotions and investment decisions can be terrible together.
But 2nd question —what’s the difference between an emotion and a comfort level?
I’m sure I’m not alone in feeling this.
The Substack link provided in response to Sandra’s recent post mentions the importance of institutions in the proper functioning of modern capital markets.
It states:
“ What matters is the health of the institutions that underpin economic predictability.
The institutional failures with the clearest financial relevance are well documented:
1)Erosion of judicial independence and contract enforcement
2)Politicization of regulatory agencies and central banks
3)Suppression or distortion of economically relevant information
4)Concentration of discretionary power in the executive without meaningful legislative or judicial constraint
5)Arbitrary property reallocation or expropriation and
6)Absence of durable mechanisms for accountability or peaceful policy reversal. “
In my opinion, every one of the listed“institutional failures” has happened to some degree.
As such I’m reconsidering my exposure to the equity and bond markets at this time.
Yes, corporate profits look good.
Yes, interest rates have fallen.
But the reality is markets need robust and stable institutions and these are currently facing great risks. Not to be dramatic, but these are the fundamental underpinnings of modern capital markets that are shifting. I’ve never experienced a massive drawdown.
I realise time in the market is what matters, but I’d rather miss some returns than weather the shock of a 10 or 20 point drop (or more). I think I have answered my own question: Things have changed for me (my view of the current stability of the institutional landscape) while my equity exposure has steadily increased. Yes, emotions and investment decisions can be terrible together.
But 2nd question —what’s the difference between an emotion and a comfort level?
I’m sure I’m not alone in feeling this.
