It's risky, so you better diversify

The outlook for stocks in the year ahead remains constructive but challenging.



Importantly:

  • Economic growth is healthy

  • Both consumer and corporate balance sheets are good

  • Job growth is strong

  • The affect of stimuluses is steady

Consequently, corporate earnings are expected to grow. The supply chain will get better throughout the year, and increased pricing will allow most firms to maintain their profit margins. This should prompt stock returns in the upper single digits while fixed income returns remain suppressed due to rising interest rates pressuring bond prices.

Washington supports higher interest rates, and the Federal Reserve is determined to have at least three quarter-point hikes over the course of this year. The fiscal policy continues to be far less stimulative as well. Fiscal years 2020 and 2021 saw the federal budget deficit at 15% and 13% of GDP, respectively. This year, the deficit is expected to fall below 5% of GDP. And, the Build Back Better Bill’s undetermined future has put a damper on the outlook for spending.

The burdensome uncertainties brought about by the wild spread of Omicron, and the Delta variant resurgence in some countries have left the services economy, especially the travel sector, unable to predict. And, the effect on the health care industry is also unclear.

We are in a mid-term election year (they usually enjoy positive stocks on average), but this year has been the lowest of the four corresponding years of a presidential term. Historically, market volatility rises during the summer months preceding the election. However, markets usually enjoy above-average returns in the 12 months following mid-term elections.

It would be best if you stayed grounded in these volatile markets. If you do, you’ll be able to outperform other investors and limit your losses. You should:

  • Diversify because greater diversification results in lower risk

  • Think outside the box because “true” alternatives like private placements, annuities, and. even cryptos typically outperform over time

  • Keep some (about 10%) cash on hand because it gives you the option of easily investing in whatever ventures come your way

  • Position correctly so if a position gets stopped, your loss is not more than 5% of your portfolio’s value

  • Use “stop losses” to control how much you are willing to lose and to take the emotion out of any decisions to sell

  • Alleviate stress by investing in companies with quality balance sheets, attractive valuations, solid earnings, and strong growth prospects

Heightened market volatility may be around for a while but if you diversify your traditional investments, try alternatives, use position-sizing and stop losses as well as checks to alleviate stress, you should prevail over these uncertain times.

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