By James Neals, CFA®
Vice President & Portfolio Manager, Optimize Financial Group
“His artistic skills are well below the class average, and he has yet to demonstrate much in the way of creativity. However, he is extremely kind and helpful to his classmates." – My Grade 4 art teacher
Somewhere, buried in my elementary-school records, is perhaps the earliest evidence of my investment philosophy: you don’t have to be the best at picking winners if you’re very good at avoiding disasters. My Grade 4 parent-teacher interview essentially concluded that I had the artistic talent of a stapler, but at least I was nice to the other kids. This created something of a quagmire for my parents, who found it difficult to be too angry with me despite the poor art grades. Many years later, the lesson still holds up surprisingly well in financial markets. Great security selection gets the headlines, but risk management is what keeps you in the game long enough to enjoy it.
That feels particularly relevant today. Many technology companies' returns have been so impressive that they have produced an entire cottage industry devoted to predicting their demise. Being bearish is often a great way to sound smart, but it can be a surprisingly poor way to make money when the underlying companies are still delivering. Corporate earnings in the S&P 500 have jumped more than 50% in the most recent quarter, while revenue is up an impressive 15%. It pays to be an optimist when the fundamentals are working, because markets have an incredible ability to climb the proverbial Wall of Worry. This year alone, investors have dealt with a 9% equity drawdown, bouts of elevated volatility, oil surging above $118, bond yields approaching 2007 levels, and plenty of geopolitical uncertainty. Yet the S&P 500 has still managed some 27 new all-time closing highs.
Sometimes the simplest explanation for a rising market is still the correct one: companies are making a lot of money. That doesn’t mean everything is fine forever, and none of this argues for complacency. There will always be another recession call, geopolitical shock, inflation scare, or valuation warning. The objective isn’t to predict which one will finally break the market. It’s to participate in the upside while making sure a surprise doesn’t permanently impair the portfolio. I’d rather be an optimist carrying an umbrella than a pessimist standing on the sidelines waiting for a storm. Participate when the fundamentals and trends are working, but size positions appropriately, diversify, and have a plan for when the facts change. That is central to how my team and I manage the Optimize Investment Portfolios. We want to participate in markets when the opportunity is attractive, while remaining disciplined about what can go wrong and planning accordingly.
So while I clearly never developed into the next Picasso, Grade 4 James accidentally discovered something useful: talent gets you noticed, but risk management (or kindness in class) keeps you around (and gives your parents one less thing to complain about). And thankfully, unlike my artistic ability, risk management is a skill you can actually improve.
- With earnings season essentially over, the headline takeaway has been incredibly strong corporate performance, with resilient fundamentals continuing to support equities.
- Strong technology results have reinforced demand for AI infrastructure, while recent weakness in technology and semiconductor stocks appears more rotational than fundamental, given still-strong earnings expectations.
- Importantly, market leadership is broadening beyond mega-cap technology, creating a healthier and more diversified backdrop.
- We remain positive but selective, favouring companies with durable earnings, strong balance sheets, and attractive long-term growth prospects.
Disclaimer: This report is for informational purposes only and does not constitute investment advice. Please consult with your financial advisor before making any investment decisions.