BlackRock says the era of steady growth has ended — and it tells investors how to position for it

Published Sun, Aug 7 20228:34 PM EDT

BlackRock says world markets have become more volatile, and they're going to stay that way for a while. The world's biggest asset manager says that the era of steady growth and low inflation has ended: "Traditional portfolios, hedges and risk models won't work anymore, we think." "The Great Moderation, a long period of steady growth and low inflation, has ended in our view," BlackRock Investment Institute said in a Aug. 1 report. "Investors are strapped in for a market rollercoaster in a new regime of increased volatility." Three investing pitfalls that are likely to trouble investors in this volatile market, according to BlackRock, and it urged investors to avoid them. And the asset manager also outlined what to do instead. Stop following playbooks such as 'buying the dip' Markets have recently rallied on hopes that the U.S. Federal Reserve is about to change course and relax its policy, following a tumble into bear territory earlier this year on hot inflation, Fed tightening and recession fears. "That optimism is misplaced, in our view. All of this calls for professional investors to change their portfolios more quickly," BlackRock analysts wrote. The asset manager said one investing bias is "public enemy no. 1" for investors, and that's inertia. Investors are reluctant to take chances or "making ones too small to affect performance." "It will be costly, in our view, to just follow playbooks such as 'buying the dip' or make slow and minimal changes," BlackRock wrote. Don't overvalue your assets Investors "clearly" should be decluttering their portfolios instead of "excessively deliberating," BlackRock says. "People with this bias overvalue their assets. The longer they own them, the higher the price they demand to give them up," the asset manager said. That bias can cause investors to hold onto positions even after an investing strategy "has played out," it said. "This can hurt performance. Positions often produce more returns earlier in their life spans, we find." Don't let losses cloud your judgment When investors are feeling stinging losses — as many do now — they're more like to hold losing positions too long, or sell winning ones too soon, BlackRock said. "Both stocks and bonds have racked up declines not seen since the 1970s this year," BlackRock analysts said. "Behavioral finance finds that people feel the pain of loss twice as strongly as they experience an equivalent gain as pleasurable." Meanwhile, BlackRock said investors find it tempting to sell winning positions too soon because of a "reluctance to take more risk for only marginal benefits." What BlackRock is doing instead BlackRock says the new era of volatility requires "an overhaul of portfolios," and says it's been reducing risk in its positions through this year. The firm managed almost $10 trillion in assets at the end of the first quarter. Here's what BlackRock said it's doing: Adding quality to portfolios : It's been downgrading developed market stocks and upgrading investment grade bonds. Position for inflation : BlackRock likes inflation-linked bonds , as it says markets are underestimating inflationary generally. "Major spending shifts and production constraints are driving inflation. Constraints are rooted in the pandemic and have been exacerbated by the war in Ukraine and China's lockdowns," it said. Position for climate goals : BlackRock said markets haven't fully priced in what many hope will be a global transition to more environmentally friendly energy sources. Over time, companies that are better prepared for such a transition are likely to be valued more highly, Blackrock said. "Climate risk is investment risk, and the narrowing window for governments to reach net-zero goals means that investors need to start adapting their portfolios today. The net-zero journey is not just a 2050 story; it's a now story," its analysts wrote. Investors can invest not only in green energy companies, BlackRock said, but also those in carbon-intensive industries with "credible" transition plans, or those that supply materials for that transition. BlackRock likes sectors such as tech and health care, which it said stand to benefit more from an energy transition. It also said there are tactical opportunities in selected energy stocks.