These days, it seems like no matter where you look stocks, bonds, or even basic groceries everything feels expensive. It’s a common sentiment among investors. But “expensive” is a relative term. Understanding what it really means and how to navigate an environment of higher prices and cautious optimism can make a meaningful difference to your long-term financial wellbeing.
Expensive Is Relative
The concept of “expensive” in investing is a relative one and is usually assessed based on where similar assets are trading. Value is not only reflected in the price, but in a variety of other metrics that measure the price of one asset relative to its earnings, it’s cash flow and a host of other metrics. Also, how these metrics compare to competitors of a similar risk profile and business will shape how “expensive” an asset is. The price of an asset is heavily influenced by the interest rate and liquidity environment. Interest rates in the US have come down by 150 basis points since mid-2024, so naturally asset prices have risen. However, this does not mean that investors should not purchase assets. If interest rates continue to decline, asset prices could increase further. If interest rate reductions are paused, then asset prices could be range bound or even decline.
How to manage
- Investors that are reliant on income from their portfolio to live are most challenged in a low yield environment. These investors should accept that they may have to SPEND MORE to get to their target income levels. These investors could consider longer-dated bonds of high credit quality issuers in order to get more income. They could also consider going further down the capital structure of a higher credit quality issuer in order to get more return. These strategies do not involve taking on more credit risk, but they will likely result in more market price volatility. However, this price volatility will not affect your total return if you hold your investments until maturity.
- Stick to liquid assets and issuers of higher credit quality: Ensure the assets backing your investments or the assets you invest in are issued by companies or entities with a credit rating that is line with your risk tolerance. Ensure you can sell the investment with ease if you wish to exit. It is important to maintain flexibility, especially when monetary policy is in transition.
- Don’t scoff at a 6% return. Compounded over 5 years that is a 33.8% increase in the value of your principal. Slow and steady wins the race. Don’t sit in cash. It is better to invest in a short dated low risk asset such as a repo or T-Bill than sitting in cash.
- Focus on process over prediction: Follow a disciplined process: Revisit your allocation quarterly and reinvest maturities based on prevailing conditions. This steady, incremental approach often outperforms “all-in” or “all-out” strategies, especially in uncertain environments.
The truth is there’s no perfect time to invest only the right approach for the moment you’re in. When the environment feels “expensive”, focus on being disciplined and strategic. Earn what you can safely earn today and be ready to redeploy when the environment shifts.
Marian Ross-Ammar is Vice President, Trading & Investment at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm
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