Did you watch the Kentucky Derby on Saturday? I had to watch it twice to understand how Rich Strike won the race. I’m not a horse racing expert, but here’s what I saw. The favorites went out too fast. The announcer even commented on it – “That opening half mile was…blazing fast.” Rich Strike spent most of the race at the back of the pack, running his race. He paced himself and waited for his opportunity. When the leaders faltered, he sprinted by all of them to an improbable victory.
A similar story is happening in the stock market today. For years, growth stocks have been the darling of wall street. Companies that showed the tiniest bit of potential for huge future earnings received premium valuations. As a value investor, I spent a lot of time analyzing why growth stocks were doing so well. Was I missing something? Each time I concluded that growth stocks were preforming so well due to multiple expansion. That’s a fancy way of saying the price went up, but earnings didn’t support it.
Rising interest rates have changed things this year. Many of the growth stocks that sprinted out to huge valuations are crashing down, looking a lot like Messier, who went out with the lead pack and died down the home stretch to finish in 15th in the Derby.
Of course, even value stocks don’t look as good as Rich Strike did at the finish. Many value stocks have also lost money, but far less than growth stocks on average. That may not seem important, but it’s very important if you’re in withdrawal mode. Having something to sell that isn’t down a lot is key to making your money last through retirement.
That brings me back to my point. You should have a portfolio that is designed to fit your needs. If you’re looking for reasonable growth with less volatility, you should own some value stock funds, some growth stock funds, some bond funds and be invested around the world. If you have a solid investment strategy, stick with it when it’s out of favor. Stay disciplined. Your time will come.
About the Author: John O’Connor
John has more than ten years experience as an Investment Advisor. He focuses on devising and maintaining portfolios that meet individuals’ needs, investment research, and investment strategy. John has been recognized as a “FIVE STAR wealth manager” by Twin Cities Business Magazine 2016-2022. He is a CFA charterholder and CERTIFIED FINANCIAL PLANNER™ Professional.
Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. CTW gathers its data from sources it considers reliable. However, CTW makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.