Stretching is generally very good for you. In its most basic form, it is a natural and automatic action. People often stretch instinctively after waking from sleep or after long periods of activity. The most established and obvious benefits of stretching is to help improve flexibility and range of motion. As the body ages, muscles can become tighter and range of motion in the joints can be minimized as I am finding out. A lack of flexibility can cause movement to become slower and less fluid making an individual more susceptible to muscle strains. This can put a damper on active lifestyles and even hinder day to day normal motions. An increase in flexibility is accompanied by improved balance and coordination.
Where stretching is to be avoided is in financial affairs, especially the equity and bond markets. With the relentless rise in the stock markets over the past year, investors are tempted to stretch and take on more risk by aggressively changing their asset allocation. For many investors, fear of a market collapse has been replaced by a fear of missing out. It is not only the rise in traditional blue chip stocks, but also the exponential rise in crypto currencies and, more particular to Canada, the exploding prices in cannabis shares which seem to double and triple almost overnight. What are you smoking is apt.
The temptation to stretch for added returns is overpowering for some. The truth is that discipline on the way up matters just as much – and is arguably harder to maintain – than discipline on the way down. If your portfolio is caught overextended when the party finally ends, you face the alarming prospect of capital destruction, often at times when you need that capital the most, such as retirement.
Bonds are also not immune to what we are seeing in the equity markets. The thirst for income despite a rise in sovereign bond yields across the globe has manifested itself in thoroughly oversubscribed junk bond sales. Risk premiums in the U.S. junk bond market this year have collapsed to their lowest level since the financial crisis.
Any long-term investment strategy is bound to make you feel foolish over the short term. This is especially true at market extremes as the limits of your patience and discipline are sure to be tested. Diversification is for patient people and that requires ignoring the siren call of euphoric markets. So, stick to your game plan with a well-constructed investment policy that is designed to work for you to achieve your financial goals.
Have a good stretch.