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Every January, analysts and pundits give their predictions for the new year. While they certainly make for interesting reading, I’ve always found them of limited value to long-term investors.

Trying to pin down exactly which stocks will outperform in 2017, or what level the S&P 500 will be at the end of the year, or what will happen with gold or oil or the Canadian dollar or whatever else – all of this seems more about PR than practical advice.

On the other hand, asking “what if” questions and trying to understand the issues and trends that might affect your ability to protect and preserve wealth – this strikes me as a prudent move for every investor.

Over the 30-plus years I’ve been working with high net worth (HNW) individuals, I’ve noticed this is a habit of wealthy investors. Rather than putting their portfolios on autopilot and tuning out the “noise” of market and economic trends, they consider the big picture and try to understand what kind of risks or opportunities might be coming their way.

Below are some highlights from the conversations I’ve had with HNW individuals over the past several weeks, coupled with my own observations, as well as insights from my colleagues, portfolio managers and other professionals.

We’re overdue for a correction

The “Trump bump” notwithstanding, most HNW individuals are concerned that the equity market is getting “toppy” and due for a correction. I agree.

At the time I write this, it’s been 147 days since we had a 5 per cent correction. Since 1928, the average number of days between 5 per cent corrections was 50. It’s been 241 days since a 10 per cent correction. Again, since 1928, the average number was 167. As far as a bigger correction of 20 per cent or more, it’s been 1,986 days since we experienced one. Since 1928, the average has been 635.

The chart below that makes the case more clear. The cyclically adjusted price-to-earnings ratio (CAPE) measures the average of 10 years of market earnings, adjusted for inflation. It’s a reasonably good measure of how expensive U.S. equities are.

Since 1928, there have been only two occurrences when the market has remained so highly valued for so long: 2000 and 2007. In both cases, the good times ended with a dramatic correction.

No one knows when a pullback will happen, or how big a correction will be. But most HNW individuals I’ve spoken to are building up cash positions, trimming back or exiting winning positions altogether and generally taking a “wait and see” approach before putting more money to work.

Political risk is an increasing concern

Last year was that of the black swan: Events that most people thought would never happen actually came to pass. Brexit and Donald Trump are examples; even the much-maligned Chicago Cubs finally beat the odds.

Investors have always had to deal with the possibility of political risk. But I’ve noted an increasing concern among HNW investors about how specific political events might affect their portfolios – a resurgent Russia, for example, or Mr. Trump’s belligerence toward China, or the increasing popularity of far-right politicians in Europe.

In response to these concerns, many HNW investors are increasingly interested in putting money to work in North America (particularly the United States) and increasingly cautious about investing overseas.

Defence is still top of mind

Given the above, it’s not surprising most HNW investors are continuing to focus on defence. As I have noted in another recent article (These Defensive Strategies Help Top Investors Deal with Market Uncertainty), wealthy investors are showing increased interest in products and strategies that protect them against volatility: hedge funds and alternative assets; private equity; and in some cases, real estate.

Most professionals I’ve spoken to expect this to continue in 2017. When faced with a world in which there seem to be a lot more questions than answers, the wealthy are taking a “protection first” approach to their portfolios. I think there’s a persuasive argument for every investor to do the same.

Thane Stenner is portfolio manager and director of wealth management of StennerZohny Investment Partners+ within Richardson GMP. He is a founding member and chairman emeritus of TIGER 21 Canada and author of True Wealth.

THE GLOBE AND MAIL, SOURCE: robert shiller, bloomberg

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