Written by Nate White, CFA
What's an investor to do in the current market environment?
Everyday seems to bring more and more bad news about the state of the economy. The mainstream media seems relentless with its negative prognostications. The mood on Wall Street is very sour, and it is nearly impossible to find anyone willing to give a positive forecast!
I just saw a Bulls and Bears segment on one of the financial networks and eve the Bull was bearish! The doom and gloom forecasts seem to be everywhere and as usual are very compelling.
The list of downside risks seems endless: stagflation, falling dollar, $100+ oil, skyrocketing commodities, real estate collapse, possible bank failures, etc.
If you believe all of these downside risks (and the resulting collapse of society as we know it) then you would be inclined to sell and wait on the sidelines (or hide in your cellar).
Could there be another significant risk that they fail to see?
It is often the unseen risk, the risk that no one can really account for or hedge against that affects the markets. No one was talking about a coming credit crisis a year ago and Wall Street thought that it was well protected against the effects should such a crisis occur.
Well, you say what could this unseen risk be? It is the risk of an upside move. What if none of the current negative events actually occur or that the effects of these event really aren't as bad a feared? Before you know it, the market has rallied and you missed out on the move and now have to buy in at a higher price.
Does that sound familiar?
Again, I'm not saying that the downside risks are not valid or that I don't agree with them. The bottom line is how much of this downside risk is already priced into the market. I'm just trying to help people consider risks that are not being widely discussed.
Are you prepared for the "risk" of an upside move?