Investment Risk and the Market Cycle – as Valuations Rise, so too Does Risk

Investment Risk – at Sprung Investment Management, we believe that investment management is about managing risk, not chasing speculative returns. Based on over three decades of experience, we also believe that as markets and valuations rise, risk increases.

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Investment risk – managing risk is about one thing: dealing with the future.

Sadly, too many investors believe the opposite: at the nadir of a market cycle they think that risk is extremely high. They want to wait “until things look more certain” before investing. Of course, by the time that happens, stock prices have risen significantly. Today, as equity markets reach new highs, they continue to buy believing that the good times will continue.

Managing risk is about one thing: dealing with the future. No one can predict the future with certainty. Therefore, risk is inescapable. However, we believe that our three-part value investing strategy is the best way to reduce risk and volatility and earn consistent returns over time. Our diligent, patient and opportunistic approach has served our clients well, through good and bad markets:

  • Appraise the intrinsic value of each company over a business cycle;
  • Seek long-term growth of capital by investing in companies that we perceive to be mispriced;
  • Utilize a margin of safety to promote return of capital…not just return on capital.

Why does our value investing approach work? Investment risk arises primarily when investors become excessively optimistic and pay too-high prices for investments. The best way to reduce risk is to buy high quality assets at reasonable prices.

As we discuss in our recent quarterly commentary, we believe that after five years of rising prices, equity valuations are looking somewhat stretched. We are not market timers and do not attempt to predict short-term market movements. However, as conservative investment managers, we think it prudent to take some profits in securities that have substantial capital gains. When markets are going up it takes discipline to increase cash positions. Cash can provide a good option to purchase good investments on any market setback.

Many investors feel that there is no need to question their advisor’s approach if their investments are performing well. Nevertheless, high returns may be the result of a risky investment strategy such as an excessive exposure to an investment class (equities, bonds, or real estate for example,) a single market sector, (here in Canada many investors have significant exposures to the volatile energy and materials sectors.) Ask yourself the following question: how would I feel if the gains I made over the past two or three years were lost in a sudden market downturn next month or next year?

As an investor, you must be vigilant in reviewing the investments you hold. Given your individual time-frame, you may find it prudent to make some adjustments in your portfolio.

Download Our Free Special Report – How to Hunt For Value Stocks. Michael Sprung will share with you 5 stocks set for long-term gains.

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Investment Risk – Risk vs. Return. Read more here>>

Investment Risk – we believe clients are more concerned about losing money than making speculative gains. Like to learn more? Please contact us here>>

The opinions expressed here are ours alone. They are provided for information purposes only and are not tailored to the needs of any particular individual or company, are not an endorsement, recommendation, or sponsorship of any entity or security, and do not constitute investment advice. We strongly recommend that you seek advice from a qualified investment advisor before making any investment decision.

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