Categories: Family Office, Financial NewsPublished On: August 26th, 2021Comments Off on Market Update – 8/20/202121.7 min read
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Minutes from the July Federal Reserve meeting triggered market volatility on Wednesday. The fourth quarter of 2021 is likely to see a reduction in the pace of asset purchases. Stock futures fell by more than 1% on Wednesday night; however, it immediately rebounded and finished green on Thursday, showing that the market is still keen on buying on dips.
Central bank easing policy (especially the US Federal Reserve) is the main power supporting the stock market. Once the Fed tightens the money supply, it will inevitably have an impact on market confidence. As the market has deviated far from economic fundamentals over the past year, major corrections will be unavoidable in the long run.
However, the high put/call ratio shows that institutional investors have been preparing for possible corrections. In the short term, the stock market is not prone to plummeting.
Is it necessary to worry about market fluctuations if you have a long-term view? It depends. If you invest in a single stock, there are a few concerns. First, the risk of company bankruptcy. Second, poor performance from previously well-performing stocks even after a long-term holding period. For example, the total return (dividends included) of General Electric (GE) from August 1, 2001 to July 31, 2021 was -47%. You lost half the original investment after 20 years.
How about investing in a stock index of a specific country? The probability of the index falling to zero is extremely low, and the probability of long-term loss is also significantly lower. However, it is not impossible: the Nikkei index has not returned to its previous 30 years highest point. It is also assumed that investors are not affected by emotions at all. Even the S&P 500 (known for continually hitting new highs) fell 55% between 2007 and 2009, far exceeding the risk tolerance of most people.
As a result, investors may still suffer losses if their portfolios are too concentrated in a single country, industry, or company. We recommend that investors use US ETFs to invest in different financial assets and markets, diversify risks, and hold a diversified investment portfolio for a long time.
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