Why this legendary investor thinks stocks could fall another 20%

Get ready for more financial hardship.

Jeremy Grantham, co-founder and chief investment strategist at asset management firm GMO, believes the stock market could fall sharply in 2023. Grantham has a reputation for calling market bubbles, and over the past few years he has warned of an impending crash.

Indeed, the market has already suffered significant losses, with the S&P down almost 20% in 2022. But Grantham says this is only “the first and easiest stage of the bubble burst we called for a year ago.” Find out why he thinks more pain lies ahead for investors.

Why Jeremy Grantham Warns of a 20% Stock Drop

In a recent paper, Grantham highlighted what he called a “rare level of uncertainty,” revealing factors he thinks could contribute to further stock market losses. These include the war in Ukraine, which he says will affect grain, oilseed and fertilizer production. bottom.

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

Overall, Grantham believes there’s a 3-to-1 chance that the S&P 500 will drop another 20% this year. He warns that if any of the negatives get out of hand, we could see a global recession. and financial problems are likely to follow,” he wrote.

Investing in a recession

As an investor, it’s not easy to stay on your toes against the backdrop of impending doom. But even Grantham admits his worst-case scenario may not play out. What’s more, if the U.S. were to go into recession, we don’t know how long or how deep it would be.

If you’re a long-term investor, a recession can present an opportunity to pick up quality stocks at low prices. What matters is your time frame. If you’re buying stocks with money that you don’t plan on getting in the next five to 10 years or longer, there’s a good chance you’ll eventually come out on top.

dollar cost averaging — Investing fixed amounts at regular intervals — makes it easier to resist the temptation to time the market. Instead of waiting for the stock to hit a low point, make regular incremental investments, which is nearly impossible. It takes a lot of emotion out of your decision making and makes sense in a volatile market.

That being said, in your case emergency fund This should be prioritized over buying stocks and other assets. With a recession looming, many financial experts believe that the traditional three to six months of emergency savings will not be enough. Some recommend spending a year’s worth or more. Make sure you have enough cash in your accessible savings account for the unexpected.

If you’re approaching retirement, seeing your portfolio fall in value can be particularly nerve-wracking. We recommend that you think about your asset allocation and ensure that you are comfortable with the level of risk involved. Bonds typically generate a fixed income and are less risky.

In good times and bad, building a diversified portfolio is another way to build wealth over the long term. This means holding stocks in various sectors and companies, as well as other asset types such as commodities and real estate. The percentages you assign to various investments will depend on you, your financial situation, and your risk tolerance.

Conclusion

It is important not to let pessimistic forecasts get in the way of wealth building. While there are times when investing in a recession makes sense, there are some important caveats. First, make sure you have enough cash for any immediate emergency, and only invest money that you don’t plan to touch in the near future.