Investors have had much to be thankful for in 2017. The global economy is set to deliver its strongest growth since 2011, and world stocks are set to advance every single month, an unprecedented streak.
Next year, we expect another year of respectable economic growth, higher corporate profits, and rising equity markets. The risk of a downturn appears low.
While our view on markets is positive, this doesn’t mean investors will have it easy. In the spirit of the New Year, there are several resolutions investors can make to better protect and grow their wealth in 2018:
- Be more agile. After years of outperformance (and market share growth) by passive funds, conditions are now more favorable for active management. Correlations between S&P 500 stocks recently fell to a 16-year low and, from 2000 to 2016, equity longshort strategies generated average annual alpha of 6.5% or more when correlation was lower than the median. Active managers can also exploit the wide dispersion in valuation between the cheapest and most expensive stocks, which is at the 80th percentile of its range since 1991. Hedge funds historically have outperformed during rate hiking cycles. These changing market dynamics give us confidence that a more agile investment stance will pay off next year, opening up market opportunities that arise from shifts in monetary policy, political developments, and technological change.
- Strive for balance. Any outperforming investment, whether it’s a single asset, a favored sector, or an exciting country, can tempt us to increase our portfolio concentration. This classic investor mistake looks particularly risky in 2018. Balancing a combination of equities, bonds, and alternatives can reduce investment risk. During the global financial crisis in 2008–2009, US stocks tumbled 51% from their peak, while a diversified portfolio declined just 29%. Geographical diversification offers protection from political risks and shifting monetary policy. Since 2009, 15 of the G20 countries have suffered a bear market decline of 20% or more, a fate the MSCI All Country World Index avoided.
- Stay calm. Accessing investment or company-specific information has never been easier. But this overload can lead to poor investor outcomes. Social media feeds shaped by artificial intelligence mean confirmation bias is more prevalent than ever. It can be tempting to trade frequently, but analysis of shortterm trades show the chances of positive performance on any given day is just 52%. Maintaining a long-term focus is critical and also requires investors to resist ill-considered investments based on the fear of missing out (FOMO). The best example is Bitcoin's headline mania, given this year’s 16-fold price increase, making it the biggest speculative bubble in history. Predicting the peak is difficult, but all bubbles tend to end the same way – with a transfer of wealth from the many to the very fortunate few. Calm means following a trusted investment framework, reducing excessive portfolio examination, and matching your investment strategy with your financial goals.
Global Chief Investment Officer WM
This year was a good year for both the global economy and global equities. Next year, we expect equities to make further gains, but shifts in monetary policy, political change, and disruptive technology mean that investors need to adapt to a changing investment context. This will require a combination of a more agile approach to investing, a diversified portfolio, and the discipline to focus on the long-term to avoid common investing pitfalls.
Do you like this?
Please click below to sign up for more investment views.