Imagine the question: "Do you want your portfolio to outperform the market?" A resounding "yes" would likely follow. Yet, what that truly means differs from investor to investor and is often measured against a self-created benchmark. 

Outperformance isn't a singular concept as investment returns can be evaluated through their absolute numbers or by considering how much risk was taken to achieve them. To get more clarity on what outperformance means to you, consider the following question: when do you want to see your portfolio excel? During periods of market growth, or periods of declines? It’s important to understand which is more important to you because it becomes difficult, if not impossible, to consistently outperform in both of those scenarios. 

As global trade uncertainties have injected volatility back into the market, now is a good time to consider your definition of outperformance and ensure your portfolio aligns with it. Doing so will guide the selection of an investment strategy that maximizes your ability to stay invested, allowing you to capture the long-term returns essential to achieving your financial goals.

The foundation: asset allocation drives return

The key driver of your long-term returns and their inevitable fluctuations is your portfolio's asset allocation—the deliberate mix of stocks, bonds, and cash. This mix can be fine-tuned further, by considering exposures to sectors, geographies, and company sizes. Ideally, your portfolio's allocation should mirror your unique goals, circumstances, and risk tolerance, providing you with the right balance of return potential and downside protection and laying a foundation for investment success. Yet, maintaining discipline throughout the market's natural cycles can still be a significant hurdle.

The allure of the ascent

In bull markets, which are fueled by investor optimism and strong economic growth, most investments tend to rise, fostering a sense of contentment. However, the seduction of exceptional gains can tempt investors to stray from their well-laid plans, chasing fleeting opportunities. This pursuit might involve a conservative investor increasing their equity exposure, an aggressive investor focusing on specific sectors, or even abandoning diversification for concentrated positions in high-performing assets.

While growth-focused strategies can be suitable—provided they align with an investor's risk profile—it's crucial to remember the inherent link between risk and reward. This connection, often overlooked during periods of sustained growth, becomes clear during market downturns, when higher-risk portfolios are disproportionately affected. Those pursuing outperformance in rising markets must therefore carefully assess their capacity to weather a potentially sharper descent.

The inevitable reversal

Though markets tend to advance over time, eventually the optimism of a bull market inevitably gives way to the caution of a downturn. This cycle is a fundamental aspect of market dynamics, despite not being able to determine the change of course in advance. After enjoying bull market gains, investors may underestimate the likelihood of a reversal. Those who adjusted their allocations for higher returns may be unprepared for the prospect of more significant declines. Let’s consider the market environment over the past couple years.

2023-2024: rising markets

• Following the market volatility of 2022, stocks experienced notable gains, driven largely by enthusiasm surrounding artificial intelligence.
  
  
• US growth stocks, with their significant concentration in technology and communication sectors, delivered substantially higher returns than more broadly diversified portfolios.
  
  
• The potential for amplified returns during this period may have prompted some investors to adjust their portfolios in pursuit of better performance.