Travis Forman is the Portfolio Manager at Strategic Private Wealth Counsel - Harbourfront Wealth Management.
Over the past few years, we have seen plenty of trends in the financial markets. From meme stocks to NFTs, there is no doubt that at some point in time, every investor has put their money to work by following the latest trend. Fad investing is exciting, but it’s not the best option for achieving financial success.
How To Stay Ahead Of The Trends
Being a smart investor involves more than buying popular assets. When it comes to investing and staying ahead of the game, get to know the market cycle and the current financial climate. This is one of the “golden tickets” to potentially making more profitable gains, avoiding volatility and, as some would say, “having the market work for you.”
By the time a trend has reached mainstream news and you decide to invest, you can be sure the opportunity has passed. You may see a news story about the ones who hit it big, but you often do not hear about those investors who lost money. And believe me, there are plenty of those around.
The best way to stay ahead of market trends is simple: consider avoiding them. Instead of spending time keeping up with the latest trends, educate yourself about current events and get to know how they impact the market’s behavior.
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The Impact Of Global, National And Local Challenges
What are some of the factors that influence the market’s behavior, you ask?
Investments do not exist in a vacuum, and market values change based on many factors. Global, national and local challenges can all affect your assets’ values—sometimes all at the same time. Regardless of where you put your money (fad investments included), several factors influence an asset’s performance.
On a global scale, geopolitical events like military action, trade wars or international sanctions can cause dramatic shifts in the market. For example, we have seen events such as Brexit or international conflicts that cause a ripple throughout the global economy. National challenges, such as changes in government policy, interest rates or unemployment rates, can also shape investment outcomes. On a local level, factors like the real estate market conditions and weather-related disasters can influence certain investments.
Given all of this, you may be wondering, “How can an investor best safeguard their investments?” The answer may be found in diversification.
Diversify Your Portfolio
To navigate challenges, investors must adopt a proactive approach and position their portfolios for long-term success. The financial markets can be volatile over the short term, and one of the best ways to counter this is through diversification.
Diversifying your portfolio means spreading your investments across various assets to reduce your overall risk. This strategy can help offset potential losses in one investment with gains in others, paving the way for risk-adjusted growth over the long term.
A simple example of this is if you’re investing in the stock market, invest your holdings across different sectors (technology, energy, CPG, etc.) instead of putting all your eggs in one basket. A truly diversified portfolio, however, typically includes a balance of both liquid and non-liquid assets.
Holding liquid assets is essential as cash is often necessary for withdrawals or to cover investment fees. You can consider cash and investments that you can swiftly convert into cash as liquid assets. Non-liquid assets, on the other hand, might not be as readily convertible but may offer robust returns over time. Examples of less liquid investments include assets like real estate, private equity and hedge funds. A diversified portfolio will balance liquid and non-liquid investments throughout various asset classes.
Diversifying into alternatives may also provide protection as these investments often do not correlate directly with traditional assets. This can help to reduce portfolio volatility even further. For instance, while the stock market may be experiencing a downturn, your private real estate investment could still be appreciating. Alternative investments include private assets, real estate, commodities and hedge funds.
Remember, though, each asset class comes with risks and a range of potential returns. Understanding these aspects and how they react to challenges in the market is crucial for successful diversification. It is important to conduct thorough research—possibly seeking the assistance of financial advisors—to ensure your investment strategy aligns with your financial goals and risk tolerance.
Focus On Retirement
Regardless of current market trends and upcoming challenges, an essential focus of investing should always be retirement. This long-term goal requires consistent attention and planning due to its potential to impact your future financial security significantly.
Retirement-focused investing typically involves a long-term perspective, which means prioritizing investments that will grow and generate income over several decades. An effective strategy can involve contributing regularly to retirement accounts that offer tax advantages to incentivize saving for your golden years. Whichever account type you choose, employing a diversification strategy can help ensure steady growth and a cushion against market downturns.
Takeaway
Myriad global, national and local challenges will invariably shape the dynamics of the financial markets. While we cannot escape this reality, we can prepare for it and navigate these complexities with a sound investment plan. This means being wary of the latest trends and considering creating a diversified portfolio with a long-term focus instead. It is a great way to stay ahead of the market’s challenges and an important factor in the path to financial success. There may be ups and downs along the way, but with a thoughtfully crafted investment plan, you can navigate any challenge that lies ahead.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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