The last year has changed our outlook towards returns, risks, and our potential. The market’s prolific rise, retail participation in the rise, and the role of index investing in this phenomenon have all led to a very confident state of mind among investors. This state of mind typifies every bull market. We tend to think it is not very difficult to sustainably generate returns.
But the truth of the matter is macros play a very critical role in every bull market. And, every bull market has its own weighing effect on the macros. The markets inflate everything. And the need to control inflation leads to the same set of consequences.
History always repeats. Investors keep learning the same lessons from history under newer global circumstances. The overconfidence in index investing can easily be explained. Investors must only connect the global liquidity, the way it recapitalized companies, the rush to deploy money, and the way money chased assets.
So, if our portfolios are all sailing great in this global high tide of liquidity, we must know what such a tide does to all boats. But the most important thing is to remember that tides which run high will also run low. The mature investor must gradually prepare for such a phase. This is very easy to say.
