Why this investment myth thinks stocks can drop another 20%

Get ready for more economic troubles.

Jeremy Grantham, co-founder and chief investment strategist for GMO Asset Manager, believes the stock market could drop significantly in 2023. Grantham has a reputation for calling out market bubbles and has been warning of an imminent crash over the past few years.

Certainly, the market has already seen significant losses, with Standard & Poor’s fell about 20% in 2022. But Grantham says this is only “the first and easiest stage of the bubble bursting we’ve been asking for for a year.” Find out why he believes there is more pain ahead for investors.

Why Jeremy Grantham warns of a 20% drop in stock prices

in The last paperGrantham highlighted what he called a “rare level of uncertainty” and outlined factors he believes could contribute to further losses in the stock market. These include the war in Ukraine, which he says is having an impact on grain, oilseed and fertilizer production. It also raised concerns about the impact of the knockout on Europe’s energy supplies.

In addition to long-term problems, such as population decline, damage from climate change, and raw material shortages, the 84-year-old investor believes the global housing bubble is just beginning to burst. He says housing crashes tend to take longer to unfold than stocks, and he predicts there will be a “painful” economic impact that has not yet been fully felt.

Overall, Grantham believes there is a 3-to-1 chance the S&P 500 will drop another 20% this year. He warns that if any of the negative factors get out of control, we may see a global factor Economic recession. He writes, “Because of the sheer length of the list of significant negatives, I believe that continued economic and financial problems are likely.” “I think it could easily turn into an unexpectedly terrible state.”

Investing during a downturn

As an investor, it is not easy to keep your nerve and keep investing in the face of impending doom. But even Grantham admits that worst-case scenarios may not unfold. None of us have a crystal ball to accurately predict what will happen. Moreover, if the US goes into a recession, we don’t know how long or how severe it will be.

If you are a long term investor, Economic downturns can provide an opportunity To pick up quality stock at low prices. Historically, prices have always recovered eventually. What matters is your time frame. if I were stock purchase With money that you don’t intend to touch in the next five to ten years or more, there’s a good chance you’ll come out on top in time.

Average dollar cost Investing a set amount at regular intervals can make it easier to resist the temptation to time the market. Make increasing investments regularly rather than trying to wait for stocks to reach their lowest point, which is almost impossible to do. It takes a lot of emotion out of your decisions and can make sense in volatile markets.

That said, if you have it emergency fund Not in good shape, that should take priority over buying stocks or other assets. As the recession approaches, many financial experts believe that three to six months of traditional emergency savings are not enough. Some recommend recruiting up to a year’s worth of money, or more. Make sure you have enough cash in an easily accessible place saving account To protect you from the unexpected.

If you’re nearing retirement, seeing your portfolio drop in value can be especially nerve-wracking. It’s a good idea to think of a Asset distribution And make sure you are comfortable with the level of risk involved. You may want to consider putting a higher percentage of your portfolio in bonds, which typically generate steady income and involve less risk.

Whether times are good or bad, building a Diversified portfolio It is another way to build wealth over time. This means holding stocks from a mix of sectors and companies, as well as other asset types such as commodities and real estate. The percentage you allocate to different investments depends on you, your financial situation and your risk tolerance.

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It is important not to let pessimistic predictions stop you from building wealth. There are times when investing during a recession makes sense, with a few important caveats. First make sure you have enough cash to see you through any immediate emergencies and only invest money that you don’t plan to touch in the near future.