The Benefits of Balance in a Bull Market

By Craig Fehr April 26, 2017

We hear about the importance of balance in all aspects of our lives. Whether it's your priorities, your diet or your checkbook – the concept of balance is a key to long-term success. And, when it comes to investing, the practice of balance should be top-of-mind as you look to stay on track with your overall strategy.

How does balance affect your investing decisions today, and down the road? Let's take a look back before we look forward.

Stocks reached record highs early in 2017, driven by rising optimism around the prospects for economic and earnings growth. And using the S&P 500 as a gauge, this is now the third-strongest bull market in the past century, with the market more than tripling since the financial crisis in late 2007.1 Looking back, certain events have caused unattended portfolios to be pushed out of alignment, such as the tech bubble in 2001 and the sharp drops from the financial crisis seven years later, the bull market that began in 2009 and the strong short-term rally after last year's presidential election. When portfolios become unbalanced, they can react differently than originally intended.

So what does this mean for investors today? As we look ahead, we think a focus on diversification and an active approach to rebalancing will put portfolios in a better position to stay on track as investment conditions shift. Consider the following perspectives and recommendations to help ensure your portfolio stays aligned with your goals, not simply recent performance.

  1. We think the bull market in stocks will continue. In our view, the gains in the stock market reflect improvement in the underlying fundamentals. The domestic economy faces challenges, but signs of slightly better growth have emerged. In the U.S., the economy is even stronger, and we think the risks of a near-term recession in North America are still low. There is also evidence of improvement in the global economy. This forms a fairly solid foundation for corporate earnings to continue to grow, and it’s the combination of economic and earnings growth that have the largest influence on performance over time. This suggests to us that the broader bull market has life left in it. Markets have been strong, but we'd caution against overconfidence, as this often leads investors to make inappropriate investment decisions.
  2. Evaluate your risk tolerance. Following the financial crisis, many investors were inclined to avoid risks where possible, while others were attracted to the perceived safety of domestic investments, defensive sectors or those that offered high dividend yields. Now, many investors may find themselves inclined to do the opposite, raising allocations to higher-risk assets that have outperformed during the rally. Remember, if your situation, strategy and long-term goals have not changed, don't let current conditions alter the risk of your portfolio.
  3. Compare your current portfolio to your intended long-term diversification strategy. This will help you determine if you're "letting it ride." In an extended bull market, it can be tempting to chase winners and avoid the laggards. An equal mix of Canadian and U.S. stocks has outperformed Canadian bonds for five straight years, with an average annual return of 15.0% compared to 3.3% for bonds.2

U.S. large-caps have led Canadian and overseas stocks. And, based on sectors in the TSX, financial services and industrial sectors have performed best over the past year, while the consumer staples and communication services sectors have lagged. These differences can create imbalances that can also affect your portfolio’s performance over time. As the bull market continues, we think asset class and sector leadership will rotate.

As you navigate the inevitable ups and downs of the market, be sure to maintain balance with your investing strategy. A portfolio review with your Edward Jones advisor can help you evaluate your risk, ensure your investments are aligned with your long-term goals or identify gaps and imbalances in your portfolio.

Important information:

Past performance is not a guarantee of how the market will perform in the future.

This information is for educational and illustrative purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation.

1 Morningstar Direct, 2/28/2017

2 Morningstar Direct. U.S. stocks (50%) represented by the S&P 500 Index. Canadian Stocks (50%) represented by the S&P/TSX Composite. Bonds represented by the FTSE TMX Canada Bond Universe.

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