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The question I hear the most from my high-net-worth (HNW) clients is "what's the outlook for the market?"

The best answer I have is the U.S. market is on "the high side of fair value" currently. The Canadian market is more fair value while there are a few cheaper markets (think emerging markets).

To illustrate, take a look at this chart. It tracks the value of the S&P 500 index (the red line) against the five-year rolling returns of the same index (the blue line). Just to be clear, a five-year rolling return would be the cumulative (not compounded) return from 1932-1936, 1933-1937, 1934-1938, and so on.

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As you can see, any time the five-year rolling returns approach 175 per cent, the market falls back pretty steeply. Perhaps even more significantly, the time between reaching that 175 per cent level and falling back down seems fairly short.

So what should you be doing now? I would suggest the same things that many HNW investors have been doing for the past several months:

Be cautious with new money
Now is not the time to rush headlong into new investments. Most sectors of the North American equity market are fully valued, if not overvalued. The opportunities that do exist are few and far between, and tend to represent special situations rather than broad, sector-based opportunities.

We are recommending to our HNW clients to be even more selective currently when allocating capital. Before committing new funds to a new idea, ask yourself honestly whether you're seizing an overlooked opportunity or simply chasing strength. If you must invest, make sure to use a rigorous buying discipline, with firm price limits rather than market orders.

Take profits, raise cash
I've said this very recently: I believe in taking money off the table. If you've been fortunate enough to have profited from the recent run-up in U.S. equity markets over the last 5 years, don't get greedy. Instead, trim back your gains and lock in your profits. This is particularly the case with more speculative positions, which are likely to get hit harder in any correction.

What should you do with the proceeds? Well, besides paying down debt (almost always a good idea), I suggest raising cash. Start building your "watch list" -- a list of managers/ETFs/companies you'd like to own if the price is right. I suspect there will be more favourable opportunities to buy in the future.

Look outside the U.S.
HNW investors know there's almost always opportunity for gains somewhere–you just have to know where to look. Increasingly, that opportunity tends to reside outside the U.S.

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I spoke briefly last week about where the smart money is going. I know several HNW individuals who have initiated positions in emerging markets, including emerging markets bonds. Commodities are currently an "unloved" asset class that might be a place to go hunting. Top-tier mining and materials producers abroad and in Canada are starting to look interesting.

Thane Stenner is founder of Stenner Investment Partners within Richardson GMP Ltd., as well as Portfolio Manager and Director, Wealth Management. Thane is also Managing Director for TIGER 21 Canada. He is the bestselling author of ´True Wealth: an expert guide for high-net-worth individuals (and their advisors)'. (www.stennerinvestmentpartners.com) The opinions expressed in this article are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Ltd. or its affiliates. Richardson GMP Limited, Member Canadian Investor Protection Fund.

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