Stock markets are trading near record highs, but investors may have more reasons to be cautious than recent gains suggest. Growing exposure to technology stocks, artificial intelligence and index funds could leave portfolios vulnerable to sudden market declines. Nick Lumpp, president of RCN Wealth Advisors, believes investors should prepare for potential turbulence rather than wait for a downturn to begin.
Market risks are growing
Speaking with TheStreet’s Caroline Woods on October 8, Lumpp warned that several market conditions could amplify future losses. Heavy investment in passive index funds, leveraged ETFs and automated trading strategies may accelerate selling when market sentiment changes.
His firm is preparing for a possible downturn during the first half of 2027, citing tighter financial conditions and signs of slowing economic growth. However, Lumpp stressed that he was not predicting an immediate market crash.
To manage these risks, he recommends reviewing concentrated investments, securing some profits and maintaining cash reserves. Diversification and portfolio rebalancing could also help investors avoid excessive exposure to individual sectors.
Gold and trend following
Lumpp favours systematic trend following, an investment strategy that uses predetermined signals to identify market movements. This approach allows investors to participate in rising markets while reducing exposure when trends reverse.
His PRTO Strategic Allocation ETF invests across large-cap stocks, small-cap stocks, Treasury bonds and gold. Under favourable conditions, the fund typically maintains approximately 70% equity exposure but can reduce that allocation to zero when signals deteriorate.
Gold also plays an important role in his strategy, accounting for nearly 19% of the fund’s holdings during the interview. Lumpp believes the precious metal can offer better diversification than bonds when inflation remains elevated.
Nevertheless, neither gold nor systematic investing guarantees protection against losses. Long-term investors may benefit more from maintaining balanced portfolios that reflect their financial goals and tolerance for risk.
