Protect Yourself In An Ever-Climbing Market

Allan Small It can be very tempting to get caught up in the emotions of the markets as investors watch some stocks, particularly some higher profile tech stocks, make remarkable gains this year. For example, Amazon’s stock price increased almost 30 per cent during the period between January 1st, 2017 and July 31st, 2017. UBS predicted in mid-July 2017 that Amazon’s target price could potentially reach as high as $1,600 in the next 12-months in its most optimistic view, up 60 per cent. This kind of double-digit growth is much stronger than traditional historic market growth rates of 7 to 10 per cent and it’s capturing the imaginations of some investors.

At the same time, investors have seen generally sustained upward momentum across North American markets since October 2016, some strong corporate quarterly earnings, coupled with the American administration’s promise of tax cuts and deregulation has had a lot to do with that. Wall Street’s VIX index, which gauges volatility, seems to be continually hitting some of the lowest levels seen in more than 20 years. With volatility at low levels, are investors being too complacent?

Some Have A Fear Of Missing Out

Some investors don’t want to miss out on the action. They start looking for opportunities while cutting corners as their confidence in the markets builds. Some develop a Fear of Missing Out (FOMO), which often means they don’t always make the best decisions. They become less conservative, making choices with less information, sometimes chasing the next hot stock and looking for the quick win. Sometimes, they become less patient with strategies designed to protect them from a potential market pullback.

Investors are feeling the kind of excitement and thrill of investing – feelings of excitement, thrill and euphoria that are often identified with the point of maximum financial risk on the Cycle of Market Emotions. These are often seen just before a market pull-back.

Investors In The Markets Who Had Not Planned To Be There

There also is a segment of investors currently investing in the stock market who hadn’t planned to be there as part of their investment strategy. These investors believe that there is really no other option for them if they want to reach their investment goals. They feel there is no alternative with interest rates at ultra-low levels for several years and the yields on other traditional investment vehicles, such as bonds or GICs, are below the rate of inflation when income tax is taken into account. Where else can they invest to make the kinds of returns they’ve expected to earn to achieve their investment goals?

If there is a significant pullback, it’s difficult to know how these investors who hadn’t been in the markets before will react. Will they see the pullback as a buying opportunity or will they panic and sell, removing their money from the stock market which can lead to a more severe pullback?

People have often talked about the Trump effect on the markets, where investors are excited about the promise of deregulation and significant tax breaks from the American administration. Many point to this as one of the root causes of the climbing markets since October 2016. Some of the deregulation activity has occurred but tax reform may take longer to pass as the administration wrestles with setbacks to steps it had planned to implement as pre-conditions for tax cuts.

Consequently, it’s best to be cautious as you develop your investment strategy.

Follow The Approach Of Cautious Optimism

When making investing decisions, follow the path of cautious optimism in terms of confidence in the market. Choose investments that make sense. Look at the fundamentals of the company you plan to buy and decide whether you think they are undervalued. Don’t just buy on the promise of tomorrow.

Several things to keep in mind as an investor in rapidly rising markets include:

Keep emotion out of investing – Think of investing as a numbers game, evaluating technical data and deciding if the numbers make sense. Try to avoid getting caught up in the excitement of the moment as that often can lead to mistakes.
Have a plan – Set targets for your investments and when they reach a certain goal, re-evaluate. You might want to sell some of your holdings and take some profit while reassessing your next steps. Rotate your assets if market conditions have changed from your initial planning activity.
Diversification – One of the safest and least expensive forms of protecting your portfolio is diversification. This can help you to weather the storm if there is a sudden pullback or market correction.

Recent quarterly results, on the whole, have been positive. Markets continue to grow, but make sure you take the steps required to protect yourself should the stock market take a turn for the worse.

Allan Small is the Senior Investment Advisor, Allan Small Financial Group, HollisWealth^®, a division of Industrial Alliance Securities Inc., (www.allansmall.com) as well as the author of How To Profit When Investors Are Scared.

He can be reached at (416) 332-3863 or via email at allan@allansmall.com.

This information has been prepared by Allan Small who is a Senior Investment Advisor for HollisWealth^®. The opinions expressed in this article are those of the Senior Investment Advisor only and do not necessarily reflect those of HollisWealth. HollisWealth^® is a division of Industrial Alliance Securities Inc., a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. Allan Small Financial Group is a personal trade name of Allan Small.