The Risk-Reward Challenge
There is no need to explain why analyzing risk and reward is the key to investing. There are a number of potential risks in the market, but let us try to simplify a bit for this challenge. We shall focus on the economy, recession chances, and the potential for a soft landing (or as we prefer, the Glide Path).
To do this properly, one needs to answer three questions:
- What are the recession odds?
- What would happen to stocks if a recession occurs?
- What would happen to stocks if the glide path is achieved?
When you have a blended expectation, you can compare it to the interest rate of your choice. The key element is to discover where one has the biggest exposure.
The answer might be different for individual investors (wanting to avoid big moves in either direction) and traders or fund managers (wanting to beat benchmarks).
At "A Dash" we suspect that most market participants focus on the probability of moves rather than the potential size of moves.
Have you done this analysis for your own portfolio? What is your conclusion?