ILMA Compoundings May 2017 - 36

BUSINESS HUB

Boarding a New Plane
By Murray Carter

t has become all too common to
describe the economic and financial
market outlook as "uncertain." To
be sure, it has been a fairly accurate
refrain given how things have evolved
over the last decade. Since 2007, market participants have had to deal with
rolling financial crises, deleveraging,
recession, deflation pressures, quantitative easing, negative interest rates,
regulation, a collapse in oil prices and
Brexit. Now there is President Donald Trump, and he has not tempered
his protectionist policy prescription.
Deregulation and tax reform are also
on the list of policy promises, but

details are still developing, leaving
investors with little visibility around
how they will settle out at the
moment. There are many proposals
floating around that have conflicting
potential effects on financial markets.
Those include but are not limited to
trade, a border tax, fiscal stimulus
and a cut in federal spending.
Some pundits describe the measured
lift in stock prices as a post-election
"sugar rush" that will soon fade. We
have some sympathy for this view,
as there is no doubt that some of the
market-friendly parts of the Trump
agenda have discounted risk assets.

Why Diversification Matters
When investing, particularly for long-term goals, there is
one concept you will likely hear about over and over again
- diversification. Why is diversification so important? The
simple reason is that it helps ensure that your risk of loss is
spread among a number of investments. The theory is that if
some of the investments in your portfolio decline in value,
others might rise or hold steady, helping to offset the losses.
DIVERSIFYING WITHIN ASSET CLASSES
For example, say you wanted to invest in stocks. Rather than
investing in just domestic stocks, you could diversify your
portfolio by investing in foreign stocks, too. Or you could
choose to include the stocks of different-sized companies
(small-cap, mid-cap and/or large-cap stocks).
If your primary objective is to invest in bonds for income,
you could choose both government and corporate bonds to
potentially take advantage of their different risk/return profiles. You might also choose bonds of different maturities,
because long-term bonds tend to react more dramatically to
changes in interest rates than short-term bonds. As interest
rates rise, bond prices typically fall.
INVESTING IN MUTUAL FUNDS
Because mutual funds invest in a mix of securities chosen by
a fund manager to pursue the fund's stated objective, they

MAY 2017

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However, as easy as it is to recommend
erring on the side of caution, given the
elevated uncertainty around the previously mentioned issues, we believe
there is more to the equity rally than
simply hope.
Both growth and profits are surprisingly to the upside in what appears to
be a synchronized global upturn. Arguably, risk assets are in a sweet spot of
non-inflationary growth, leaving central
banks to proceed with caution and
monetary policy to remain accommodative. We forecast a pickup in global
growth in our Outlook 2017 piece, so
the improvement comes as no surprise.

can offer a certain level of "built-in" diversification. For this
reason, mutual funds might be an appropriate choice for
novice investors or those wishing to take more of a hands-off
approach to their portfolios. Including a variety of mutual
funds with different objectives and securities in your portfolio will help diversify your holdings that much more.
Mutual funds are sold by prospectus. Please consider the
investment objectives, risks, charges and expenses carefully
before investing. The prospectus, which contains this and
other information about the investment company, can be
obtained from your financial professional. Be sure to read
the prospectus carefully before deciding whether to invest.
DIVERSIFYING AMONG ASSET CLASSES
You might also consider including a mix of different types of
asset classes - stocks, bonds and cash - in your portfolio.
Asset allocation is a strategic approach to diversifying your
portfolio. After carefully considering your investment goals,
time horizon and risk tolerance, you would then invest different percentages of your portfolio in targeted asset classes
to pursue your goal.
WINNING ASSET CLASSES OVER TIME
The following table, which shows how many times during
the past 30 years each asset class has come out on top in
terms of performance, helps illustrate why diversifying
among asset classes can be important.

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