Just keep calm!

Not getting hectic when investing money has always paid off. Interest and inflation should be observed, but nothing more. The markets are calmer than they seem – an analysis.

Just don't let the rush arise: Stock traders on the floor of the New York Stock Exchange.

In last week the US Federal Reserve caused some movement in the financial markets; excitement would be saying too much. She hadn’t actually done much, but central banks don’t even need to – what they say is enough or even what you talk about.

In any case, it made people sit up and take notice that the attitude of the Federal Reserve that they want to look through the current inflation rates is not that far off.

From Wednesday to Friday of last week, this actually caused share prices to slide. The S&P 500 fell by almost 2 percent – which it caught up again this week by return of post. The yield on 10-year US government bonds fell significantly, from just under 1.59 to 1.36 percent on Monday morning, but has since recovered to at least 1.48 percent.

Adjustments take a little longer

This (partial) withdrawal of the move is the usual overshoot of the market and a return to what is considered appropriate. In short: The long-term trend in the bond market is assuming higher interest rates, and that is not affecting the stock market at all.

It is becoming increasingly clear what one should actually have known: a permanent change in prices and interest rates does not happen that quickly. So it is a little premature to price in an American key interest rate of 0.6 percent (!), Which is expected for the end of 2023. And if, as Chris Iggo, Chief Investment Officer for core investments at AXA Investment Managers, writes, economic measures lead to an increase in bank deposits, then bonds will continue to be bought and there will be no big increase in yields.

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On the positive side, one shouldn’t neglect that the signal from the Fed was: We take your inflation concerns seriously. And so the market was given an interest rate scenario – concrete enough to suggest security and vague enough to be able to do something completely different in case of doubt.

What lessons can be learned from this? The most important one is: strength lies in calm. In Germany in particular, people are extremely sensitive to inflation. There are historical reasons for this, because the experience of hyperinflation from 1923 has had a significant impact on monetary policy to this day. Without wanting to downplay the Bundesbank’s successes, one has to admit that the lack of high inflation rates is due to monetary policy over time to a lesser extent. And you don’t have to fall off the horse on the other side, you can also keep calm in the saddle.

Investors should therefore not overestimate the risk of inflation. Higher but still low inflation rates might even be more of an opportunity in the long run. Because they may mean that bonds can finally take on their risk-minimizing function in a portfolio again.

Modesty is an ornament

So what is to be done now? That depends on how you’ve managed your wealth up to now. Many investors believe that they can get the best out of them with short-term detailed management. As a rule, this is due to an error and a false perception of one’s own success. Because if you want to do so better than the market, you have to make more right than wrong decisions. But to think of yourself as smarter than the average is quite a brave approach when assessing complex economic processes and financial investments.

Modesty is an ornament with which one can go further in investing than without it. Although higher returns are not linearly associated with higher risk, they tend to be. As a result, trying to get a little more out of it leads to more risk. And if you go all out, you do it more with risk than with return.

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So if you have designed your portfolio in such a way that you have weighted bonds less heavily due to the higher risks in the market distorted by monetary policy, added a little more alternative investments early on and set up a diversified equity portfolio, you really needn’t worry.