The Real Risk? Not ParticipatingChristopher Briggs
After another year of performance gains by North American stock markets, many investors are asking: where are the markets headed in 2018?
Some of us have found it difficult to enjoy the market’s advances, instead expressing concerns about market prospects and preserving paper gains — eight years of a bull market can do that!
Of course, nobody can predict the course of near-term markets, except to say that fluctuations in either direction should be expected. Investing is often unpredictable, and this is a good reminder that your portfolio has been built to be enduring throughout the inevitable market cycles. We work to control risk in your portfolio in many ways, including maintaining a certain asset mix, ensuring diversification, limiting the size of any holding and emphasizing quality — all based on your own personal risk tolerance and objectives.
Having this discipline is important even in up markets. We have all seen superstar stocks turn into supernovas over time. Risk control helps to ensure that events such as these do not cause significant harm to overall portfolio values. During down markets, it helps to mitigate risk and limit the downside. Remember that avoiding all risk will often mean forgoing most return as well.
A focus on the longer-term can also serve us well. Renowned investor Warren Buffett recently declared that the Dow Jones Industrial Average (Dow) will reach 1,000,000 points within the next 100 years. At first glance, this figure seems extraordinary; 100 years ago, the Dow opened at a mere 77 points. Yet, this level could be achieved with an average annual growth rate of less than 4 percent.
But Buffett’s view is not a bearish prognostication; rather a message for investors to focus on long-term expectations and goals. Over time, the markets are expected to continue their climb. Regardless of what happens in the short term, the longer-term wealth-building potential remains strong. The real risk? Not participating.
There are many reasons to remain optimistic. Our economy continues to grow despite lower resource prices. Oil prices have shown modest increases and corporate earnings have been strong. But there are also challenges: ongoing NAFTA negotiations may potentially impact Canadian business competitiveness. Growth is also anticipated to slow this year.
Nevertheless, don’t overlook the opportunity for markets to continue their climb. Participate, for the sake of your future prosperity!