A gradual ascent will help avoid any falls – the world is an unpredictable place
Brendan Greenwood, CIM, B.Comm | March 7, 2022
The recent invasion by Putin and his military forces into Ukraine is seen as a threat to the future democratic order of the world. Combine this with geo-political risk between China and the US over Taiwan, global inflation and a projected 5 to 6 interest rate hikes over the next year, and you have a recipe for greater volatility in stock market valuations.
Two years ago, when the pandemic was first declared there was a major stock market correction. This initiated a race for new vaccine treatment and ignited new hope for the future and a technology growth stock buying binge that drove up stock valuations to new highs. Many of the companies that captured the imagination of investors had little to no profit.
The market valuations were based primarily on projected future earning potential. Increased uncertainty about the future and the expectation of rising interest rates is forcing a revaluation of future income potential and lower valuations for many stocks.
The investment fund manager, ARKK investments runs exchange traded funds focused on technology based growth companies. As can be seen from the chart (ARKK’s sinking feeling), many of the stocks held by the fund manger have lost more than half their value from their respective 2021 peaks.
If you bought into high flying companies like Zoom Communications, Robinhood Markets, Draft Kings or Teledoc you may be staring at losses in your portfolio of greater than 50%. The chart below highlights how much of a return you need to recover from a large loss. A 50% loss requires a subsequent 100% return to make your money back. Taking on too much risk can be very damaging to your portfolio.
If you find that your investment portfolio’s returns are falling behind. You may have too much exposure to high volatility stocks, and this could be hurting your long-term return potential. This is especially true considering the current market environment.
Research has found that contrary to popular theory, low risk stocks produce higher returns over longer periods of time. The chart that follows highlights findings from a study done by Robert Haugen, a pioneer in quantitative investing. The study examined the average annualized return of US stocks over 20 years, comparing returns to their respective volatility. He discovered that over the long term less risky (volatile) stocks outperformed.
Based upon this research a lower volatility investment strategy not only allows you to sleep better at night (especially in times of greater uncertainty), it also offers you the potential of better long-term investment portfolio performance and a more comfortable retirement.
An advisor can play a valuable role in implementing this type of investment growth strategy that works best for you and keeps you on track to hit your savings goals.
Brendan Greenwood is an Investment Advisor with Worldsource Securities Inc. focused on personal pension strategies and leveraging technology to provide progressive institutional style investment solutions for professionals, incorporated individuals, business owners, retirees and their families.
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