The traditional "set it, forget it" investment strategy, once a staple for individual investors, is no longer viable in today's unpredictable market environment. Lisa Shalett, Chief Investment Officer at Morgan Stanley Wealth Management, has emphasized the need for investors to alter their approach due to increasing uncertainty and rising risk premiums. Over the past two years, the S&P 500 index fund experienced remarkable gains of approximately 70%, leading to a widespread adoption of this passive investment strategy. However, Shalett warns that the economic climate has shifted, necessitating a more proactive approach to investments.
Shalett attributes the decline of the "set it, forget it" strategy to several key factors. The Federal Reserve's decision to maintain interest rates without further cuts has contributed significantly to this shift. As a result, investors must now focus on risk premiums and diversify their portfolios to mitigate potential risks. According to Shalett, simply parking funds in an S&P 500 index fund is no longer sufficient, and investors must be prepared for new considerations every day.
"The set it, forget it is done," said Lisa Shalett, Chief Investment Officer at Morgan Stanley Wealth Management.
The recent 30-day pause on tariffs for Canada and Mexico has not alleviated the growing sense of uncertainty in the market. Shalett highlights that no one can predict the outcomes once this pause concludes, potentially leading to negative market reactions. Consequently, she advises investors to demand higher returns commensurate with the risks they are taking. Shalett stresses the importance of pricing in risk when faced with increasing uncertainty.
"When you have rising uncertainty, you need to price in risk," Shalett explained.
In light of these developments, diversification emerges as a critical strategy for investors. Ivory Johnson, a certified financial planner, supports this perspective by noting that the investment environment is transitioning into a phase known as "The Great Normalization." This period is characterized by normalized rates and valuations, with equities driven by earnings growth rather than index concentration.
"We can't set it and forget it because there's new considerations every morning when you walk in the door," Shalett remarked.