Investing for the Long Term in an Uncertain Market

Jun 27, 2023

The recent stock market rally overlooks fundamental risks. Here’s why cautious investors shouldn’t fear missing out on short-term gains.

Lisa Shalett

Key Takeaways

  • Investors may be tempted to abandon caution and join in this year’s U.S. stock-market rally.
  • They should remember that thoughtful risk management and asset allocation remain key to long-term investing success.
  • In a frothy market, stay focused on the big picture and avoid trying to predict the market’s next moves. 

Investors continue to show enthusiasm for U.S. stocks and confidence in an economic soft landing. This conviction has helped the benchmark S&P 500 Index advance about 13% and the Nasdaq roughly 30% in 2023.


But as the Global Investment Committee has noted repeatedly, we believe these valuations overlook significant risks: sticky inflation, higher-for-longer interest rates, declining corporate earnings and tightening market liquidity.


Investors who have taken a cautious approach this year, avoiding significant passive exposure to these benchmark stock indices, may regret that they haven’t reaped the recent gains and fear missing out on any advances that may be ahead. However, missing the mark from time to time doesn’t mean prudent investors should abandon their long-term investing strategy and begin chasing recent market performance. On the contrary, times like this may present an opportunity for investors to refocus on what really matters in the long run for accumulating and preserving wealth. We see four foundational principles for successful investing: 


  • Risk management is key to avoiding losses that exceed investors’ acceptable boundaries. In investing, the mathematics of gains or losses are said to be “asymmetric.” That means some investments may offer a more attractive potential return, for a given level of risk, than others. As such, investors need to build diversified portfolios with a goal to maximize potential upside and minimize the downside – all within the boundaries of their personal tolerance for risk.


  • Investors should invest strategically based on their goals. Rather than attempting to predict tops or bottoms in asset prices, they should set target allocations for various asset classes in their portfolio and periodically rebalance their investments back to those assigned allocations. Along the way, investors should allow for tactical adjustments based on evolving market trends or economic conditions, such as strong potential performance in a certain sector or security, to inform decisions about when and how to deploy new capital or to selectively liquidate assets to fund spending needs. The key to this exercise is to stay invested; cash on the sidelines is often a missed opportunity.
  • Long-term returns are closely linked to valuations. Investors should pay attention to metrics that reflect how expensive or cheap an investment is. For example, investors buying high-flying U.S. stocks now may be dismissing that these securities are relatively expensive at this point. With price-to-earnings ratios that are significantly higher than long-term averages, these stocks can be expected to eventually revert to those averages, suggesting their recent outsized returns may not last.
  • Some environments may favor certain strategies or asset classes over others. It’s important to note that fundamental market conditions change, and investors need to adapt accordingly. For example, during periods of muted equity returns, actively selecting securities may be more likely to help investors capture superior risk-adjusted performance than passively tracking an index. 


In the current market, we see a few opportunities. In fixed income, consider adding duration by investing in longer-maturity bonds. In equities, we believe that U.S. stock returns are apt to be below average. Investors should diversify using active managers or equal-weighted indices. We continue to see Japanese and emerging-markets stocks, as well as commodities, as good hedges for a peaking U.S. dollar.


The bottom line: Investors need to think about the big picture. Don’t try to predict market moves. Instead, work with your Financial Advisor to stay close to your strategic asset allocations, rebalancing as needed.


This article is based on Lisa Shalett’s Global Investment Committee Weekly report from June 26, 2023, “The Big Picture.” Ask your Morgan Stanley Financial Advisor for a copy. Listen to the audiocast based on this report.

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