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In Growth Investing, Don’t Overdo Caution

It’s important to always take some degree of caution in your growth investing. But it’s possible to take too much caution.

It’s important to always take some degree of caution in your growth investing. But it’s possible to take too much caution. And that’s true in many walks of life.

For instance, when a responsible traveler checks into a hotel, he or she looks at the emergency exit map on the back of the door. Responsible travelers may even walk through the distance from the door to the exit stairwell.

When they get on a cruise ship, they do the shipboard equivalent, getting familiar with the escape routes, life vest availability and the location of lifeboats.

There are a ton of other little precautions that careful travelers practice, like keeping xeroxes of their passports in their suitcases, letting their credit card companies know that they will be outside their usual ambit, packing Immodium (just in case). And so on.

Of course it’s possible to overdo caution, and we all know people who are so focused on possible bad things that they take the joy out of travel (and most other things).

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For growth investors in a long-running bull market, finding the balance between caution and enthusiasm can drive a person nuts.

And let me say right here that I realize that I’m habitually talking out of both sides of my mouth. And so is just about every responsible growth investing advisor I know.

I point out constantly that it’s a bull market and that you should be heavily invested in great growth stocks.

But I also harp on the likelihood (certainty, actually) that there will inevitably be some kind of correction/bear market event in the future and that you should also be prepared for that eventuality.

The responsible growth investing advisor’s job is to give you the confidence you need to put money to work when the market is doing well. But it’s also an advisor’s job to keep you from getting so confident that you fail to see when a bull run is ending and it’s time to sell.

As we plow further into earnings season, we can certainly look in the rear-view mirror at a great year.

In 2017, my Cabot Global Stocks Explorer portfolio gained 55.6%. Emerging markets acted exactly as they are supposed to, with higher volatility producing bigger swings both up and down. And the portfolio did well by riding winners higher and keeping losses small, just like the growth investing playbook says.

For comparison purposes, during the same calendar year, the iShares MSCI Emerging Markets ETF (EEM), which is the basis of the Cabot Emerging Markets Timer, was up 36.7%.

Given the aforementioned likelihood of a correction, it’s doubtful 2018 will be quite as fruitful for the broad market as 2017 was. But that doesn’t mean you should start preemptively batting down the hatches already!

You should definitely be investing with your eyes wide open, in preparation for an eventual pullback. But don’t break out the Immodium just yet. Otherwise, you might take the joy out of your growth investing—and miss out on some potential profits in the process!

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Paul Goodwin is a news writer for Cabot’s free e-newsletter, Wall Street’s Best Daily.