[PB Notebook] Principles Investors Must Never Forget

Last year, the financial market showed an unusual pattern where most asset prices, including stocks and bonds, performed poorly due to a combination of inflation, interest rate hikes leading to reduced financial market liquidity, and recessionary pressures. Unlike last year, stock and bond prices are rising this year. This is based on the 'Goldilocks' expectation that inflation will stabilize quickly and the recession will be mild. However, it is still too early to declare stability, and the investment environment is expected to be more uncertain than ever this year due to higher interest rates and recession forecasts. In uncertain times, it is wise to adhere to investment principles.

Let’s look at three investment principles to keep in mind for 2023.

First, Lower Your Target Returns

Since uncertainty is high, excessive greed should be avoided. Investment involves risk. Risk refers to the probability of investment failure. Higher risk can lead to higher returns, but it also increases the chance of failure. In the current situation of heightened financial market uncertainty, the risks associated with investment become even greater. Therefore, it is advisable to reduce risk and protect assets from uncertainty, even if it means setting somewhat lower return targets than usual. A typical approach is to hold a certain amount of safe assets such as cash. Cash not only allows for safe management of funds in uncertain times but also has significantly improved profitability due to rising interest rates. During the ultra-low interest rate period, managing assets as cash was considered a loss, but the situation has changed. Due to the Bank of Korea’s base rate hikes, the yields on domestic cash-equivalent products have risen to the highest levels since the global financial crisis.

Second, Focus on Blue-Chip Stocks and Bonds First

In times of high uncertainty, companies that can steadily generate cash flow are more favored than those with high future growth potential. Therefore, investment strategies focusing on income through interest and dividends are more advantageous than those aiming for capital gains from asset price increases. Bonds are a representative income-type asset. Bond income through interest has increased due to rising interest rates, and investment conditions are expected to improve with declining inflation and the end of base rate hikes. However, since credit risk may increase, it is necessary to focus investments on high-quality bonds such as government bonds. Stocks are likely to face headwinds from earnings declines due to the recession. Therefore, defensive stocks such as blue-chip stocks and dividend stocks with stable financial structures and steady cash flow generation capabilities appear to be more effective than high-growth stocks.

Third, Remember That After a Downturn, There Is an Upswing

Finally, it is never good to despair or become fearful and completely exit the market just because conditions are unfavorable. Past cases show that although the stock market fluctuated greatly during recessions or financial crises, it eventually recovered over time, and stocks have shown better long-term performance than other assets. It is regrettable that individual investors seem to have been left out of the recent domestic stock market, which has shown higher growth rates compared to other markets. Even in difficult market conditions, it is advisable not to drastically reduce stock holdings but to maintain some investment while waiting for recovery. If maintaining discipline is difficult, choosing an ‘asset allocation product’ that diversifies across various global assets is also a good option.

KB Kookmin Bank WM Star Advisory Group GOLD&WISE THE FIRST Center

Im Eun-sun, Deputy Center Head