What are the signs and portents for the stock markets? As a futurist who started his career as a stock market research analyst, I see a number of things of significance going on. But first, a word of caution: I'm writing this in early August, you're probably reading it in the autumn. Stock markets have a habit of making fools of the even the wisest - and me, too!
- The long-term direction of the stock market is most decidedly up. I firmly believe that the Dow Jones Industrial Average and the TSE 300 will each break 20,000 by the year 2020, propelled by baby boomers intent on saving for retirement. This trend will dominate, but not eliminate, all others.
- Assuming governments can avoid a damaging trade war, the global economy is gaining momentum. This will accelerate prosperity, and is excellent news for global stock markets. Good times, however, will not be evenly distributed, and dramatic volatility will remain.
- E-commerce will continue to revolutionize the way business is done, driving down prices, increasing prosperity, and cause a changing of the guard from big, clumsy companies with market share to the nimble who able to capitalize on new developments. This mimics the 19th century economic boom caused by the transportation and communication revolution, and further fuel rising stock prices.
On the downside:
- The economic cycle has not been tamed. There will still be recessions, and they may be more savage than before as problems in one country will create a domino effect in others, accentuating trends and leading to higher highs and lower lows. This means that stock market corrections will be scarier and more dramatic than ever before. The 'Asian flu' may be a blueprint for recessions to come.
- No one knows what fundamental value is in Internet and high tech stocks, so there is a significant risk that such stocks have been bid up too high. This could precipitate a dramatic sell-off in all stocks, even those that have sound fundamentals.
- Less than 30% of stock brokers and financial advisors in North America have been through a protracted bear market. This is leading some advisors to egg their clients into risky positions that can only pay off if a bull market continues. With this lack of leadership, market corrections could become market panics.
How, then, does one play all these diverse forces, and profit in uncertain times? There is a simple, five-step strategy:
- Know your objectives and have a plan to meet them.
- Make sure you have a well-educated, experienced financial advisor to help you develop a sound investment strategy.
- Don't make your decisions based on headlines or market emotions. If you have a loss on a stock, and it's not the best investment available to you, sell it. If you have a big profit, but it's still the best investment, hold on to it.
- Keep a balance between sleeping well and eating well. Don't plunge into risky situations that keep you awake at night, yet don't be so conservative that your future needs will not be met by your portfolio.
- Keep your planning horizon in mind. If you're going to need the money within three to five years, you should be moving towards more conservative investments so you won't have to sell at a loss if markets are down. If you're not going to need the money for some time, then ignore the ups and downs of the markets and invest for maximum long-term results.
© Copyright, Incremax Financial Research Corporation, September 1999
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