Investors must be alive to the real risk of being “sucked into the euphoria vortex”, according to an industry insider.
Debates are raging over when this bull market, now in its ninth year and the second longest in history, will end. Chad Larson
, portfolio manager, senior vice president at National Bank Financial
, agrees with the general consensus that we are in the late stage of the upward cycle and warns that the biggest danger in 2018 is sentiment, advising people to adapt their portfolio for an inevitable downswing.
“The best of times are over,” he said. “Market cycle, value and sentiment drive prices – we all agree that we are in the late stage of the upward cycle; that valuations are stretched and that sentiment or euphoria in this case is high.
“The largest risk will be sentiment; markets are over confident and subject to shock. It could be geo-political, it could be scandal, it could be a myriad of things but it will be systemic risk that is the largest risk in the market this year.”
Many advisors have been urging restraint through the turn of the year, with interest rates and inflation both expected to rise and “caution” the buzz word among commentators.
Larson warned investors they must have a stringent process in place when the good times end, predicting that the “tailwinds of euphoria” will keep pushing the markets higher before it faces a headwind later in the year as people start to factor in the rising risk of a 2019 recession.
He said: “My top tips for investors this year are to prepare your portfolio and your thinking to adapt to a strategy that will help make the most of late-cycle returns, while preparing for inevitable downswing.”
Larson broke down his advice for an investment plan, urging a strict strategy and highlighting “drastic sentiment” as the biggest concern for investors going forward.
He said: “First, diversify your source of returns and, second, have discipline around implementation and rebalancing. Thirdly, utilize a robust dynamic asset allocation process to help guide tactical positioning. Without a process, there are very real risks of being sucked into the euphoria vortex.”
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