Tag Archives: investing

Advisor’s Alpha

Posted By Financial Independence Hub | July 27, 2020

By John De Goey, CFP, CIM

Special to the Financial Independence Hub

One of the great debates around the investing world revolves around the extent (if any) to which advisors add value. Many in the media say the number is either small or negative. Many advisor cheerleaders say the number is substantial. Everyone should be skeptical. What follows is my unscientific assessment of the pseudo-debate (two opposing factions that have a story to spin where it is difficult to ascertain or refute either position).

The people at Vanguard have long been touting their own research (complete with quantified bandwidths for varying activities) on this topic. Their general position is that advisors add about 3% in “value” to their clients’ portfolios. Colour me skeptical. To begin, it is possible to drown in a river that is, on average, only two feet deep. Averages can be deceptive, especially when the variance in the things being measured is likely to be wide. There is really no such thing as an average advisor or an average client. Using the word “typical” might be a bit more accurate and helpful, but frankly, I doubt it.

There are some good advisors out there – and some lousy ones, too. When I hear people talk about the suite of services that might be offered, the usual presumption is that all advisors are doing all those things. That’s simply not true. In short, almost any assessment of value added (say 3%) is likely to be truest only of the very best practitioners. Only the very best are likely to be doing all the good things that cause advisors to score highly. Ordinary advisors don’t do those things. Poor advisors might very well be doing the opposite.

That’s my major beef, but there are others. Remember that advisors are not monolithic. They’re all over the place regarding what they do, how they do it and who they do it for. Part of that is because their clients are all over the place, too. Some are slothful to the point of it being difficult to get them to do anything; others are hyper-sensitive to media hype and short termism. Good advisors provide focus and discipline, but that is difficult to reliably quantify and, at any rate, likely looks different for different clients.

Two counter-narratives

Allow me to offer two counter-narratives to the idea of (most?) advisors (consistently?) adding 3% over a long-term time horizon. The first is the annual Dalbar study, the “Quantitative Analysis of Investor Behaviour” (QAIB). Dalbar admits that while the study purportedly shows how investors can do unnecessary harm to their return by (among other things) chasing past performance, the people at Dalbar have no way of disaggregating causation. Continue Reading…

The Covid-19 Fight: Round 1 goes to Fear, Round 2 to FOMO

Posted By Financial Independence Hub | July 8, 2020

By Noah Solomon

Special to the Financial Independence Hub

Round One goes to Fear

Prior to the COVID pandemic, it had been some time since investors felt anything close to the level of fear that gripped markets during the global financial crisis of 2008. As global stock indexes plunged over 30% from their late February 2020 peak in little more than four weeks, media pundits and investment managers were predicting Depression-era scenarios.

Round Two goes to Fear of Missing Out (FOMO)

Just as investors were fearing the worst, the cavalry (primarily in the form of the Federal Reserve and the US Treasury) saved the day, unleashing an unprecedented amount of both monetary and fiscal stimulus. These initiatives gave a strong boost to risk assets, which were deeply oversold on a short-term basis. As markets initially bounced off their late March lows, there were few optimists.

As stocks continue to climb to within striking distance of their pre-pandemic highs, many investors have not only become less fearful, but have embraced the notion that stocks have significant upside potential over the near to medium term. Refrains of “Don’t fight the Fed” and “Powell put” have gained increasing acceptance and have caused many market participants to shift from fear to FOMO.

For What It’s Worth (this has nothing to do with the way we manage money … but we can’t resist)

If it turns out the worst is indeed behind us, this would be the first bear market that put in its lows within five weeks of its pre-selloff peak. After the dot com bubble burst, it took the S&P 500 Index approximately two and a half years to finally hit bottom in October of 2002, at which point it had declined 47% from its March 2000 peak. During the global financial crisis, it took the index about one and a half years from its July 2007 peak to finally bottom out in March of 2009, by which time it had suffered a decline of about 55%.

To be clear, we are not insinuating that the massive monetary and fiscal responses that have occurred are irrelevant or that, all else being equal, they are not positive for markets. But the trillion-dollar question is whether they justify the stock market’s 45% gain from its late March lows (in the case of the S&P 500 Index) and the halving of high yield bond yields.

Without going into an exhaustive list of positives and negatives, it is probable that markets have over-discounted good news while under-weighting potential risks. In our view, at current levels the odds aren’t in investors’ favour. There is a distinct possibility that the mighty market brontosaurus has been bitten on the tail, but that the message has not yet reached its tiny brain. This is not to say that markets can’t creep higher, but merely that the probability distribution is unfavourable.

Einstein’s Definition of Insanity

Regardless of whether you think that markets are going higher or lower over the short, medium or long term, what is clear is that the current level of uncertainty is elevated if not extreme. Continue Reading…

Accelerating digital trends create opportunities in U.S. equities

Posted By Financial Independence Hub | June 12, 2020

By Grant Bowers, Franklin Templeton Canada

(Sponsor Content)

The economic downturn caused by the global COVID-19 pandemic is accelerating major themes in digital transformation as businesses and workers adjust to new ways of providing goods and services. This acceleration of trends is creating opportunities for investors in the equities of U.S. companies in sectors such as technology, health care and pharmaceuticals.

There are pockets of opportunity now in U.S. equities for selective investors and if you can look through the near-term uncertainty, you can buy great long-term companies at good prices.

The technology sector has benefitted during the shift to a “work from home” environment: especially products and services related to cloud computing, remote access, digital payments, and online security. This technology is in higher demand as individuals, companies and organizations rely on technology to work, communicate with clients and staff, and perform transactions in a virtual platform during pandemic restrictions. The COVID-19 crisis is also highlighting the powerful combination of technology and health care in areas like gene sequencing and data analytics, which will benefit pharmaceutical and biotech firms in the future.

Outlook for U.S. economy

Overall, the U.S. economy likely will remain affected by weakness driven by the pandemic for some time, but the economy should begin to show improvement in the fourth quarter, accelerating into 2021. Decisive stimulus actions taken by the U.S. Federal Reserve will likely help bridge the downturn for many businesses and consumers.

If progress is made on developing a medical treatment for the coronavirus — including a vaccine — then there could be a fairly rapid “healing of the U.S. economy” and a rebound of pent-up consumer demand when restrictions are loosened.

A health care crisis needs a health care solution: there is a massive research effort under way to develop an effective medical treatment of the coronavirus.

Positioned for opportunities in trend acceleration

As the digital technology transformation advances, companies in some of the most innovative sectors of the U.S. economy are positioned for growth during the downturn. For example, we see opportunities in the wireless tower space as part of the wider shift to 5G wireless technology and the increased focus on data usage and mobility for individuals and businesses. Providers of software for back-office business processes, which are essential for workers at home during the crisis, are another opportunity. Continue Reading…

Looking in the rear-view mirror to avoid hitting something that lies ahead

Posted By Financial Independence Hub | June 8, 2020

By Noah Solomon

Special to the Financial Independence Hub

The vast majority of today’s portfolios represent a Pavlovian response to the obliging nature of markets over the past several decades. The unprecedented increase in the value of risk assets coupled with low volatility have lulled investors into a false sense of security accompanied by an “if it ain’t broke, don’t fix it” approach to portfolio construction and risk management.

Most portfolios are dependent on the next few decades mimicking the last few. Specifically, they are over-allocated towards assets that have performed well during the secular (yet unusual) goldilocks environment of the past 40 years. As is typical of human behaviour, investors are looking in a 40-year rear-view mirror to avoid hitting something that may be in front of them.

What is Normal?

The past four decades have been unusually kind to investors. Strong tailwinds of favourable demographics, low inflation, falling rates and globalization have fueled an unprecedented rise in stocks, bonds, real estate, and almost every other major asset class. While it would be nice if these conditions were the norm, the fact is that they are unique from a long-term historical perspective.

An astounding 91% of the total price appreciation of a classic 60/40 equity/bond portfolio over the past 90 years is attributable to 22 years between 1984 and 2007. This period was also an atypically strong period for real estate, representing 72% of total appreciation over the past 90 years.

Notwithstanding some painful bumps along the way, including the tech wreck of 2000-2002 and the global financial crisis of 2008, the investing experience of most people today has been a proverbial walk in the park. An entire generation of investors has never experienced anything like the 86% peak-trough decline in equities of the 1930s which resulted in two decades of lost performance. Nor has it faced anything remotely like the 25% decline in U.S. Treasury Bonds during the stagflation-plagued 1970s.

What If?

Nobody (including us) can know for sure what the future holds. However, there are strong reasons to suspect that the road ahead will be drastically different than the unusually smooth path we have been on for the past several decades. Historically high asset valuations, record corporate and sovereign debt levels, $17 trillion in negative yielding debt, the lowest capital gains taxes in U.S. history, historically high income disparity across the developed world, and a global rise in populism and protectionism all suggest that, as Dorothy stated in The Wizard of Oz, “We’re not in Kansas anymore.” Continue Reading…

Are stock markets ingenious or insane?

Posted By Financial Independence Hub | May 26, 2020

Janice Gill/Unsplash

By Steve Lowrie, CFA

Special to the Financial Independence Hub

You’ve probably heard the expression, “crazy like a fox.” If you’ve ever watched a winter fox in action, you know what that means. Hunting for prey, the fox will leap around in seemingly insane gyrations until … wham! It’s scored a tasty tidbit hiding in the snow.

Has the stock market gone similarly crazy lately? Like the fabled fox, there are actually some incredibly sensible dynamics behind the market’s seemingly manic moves. Let’s cover three reasons why investors should ignore its transitory twists in pursuit of satisfying returns.

Market pricing vs. economic indicators

To the surprise of most, markets surged in April, with the US stock markets experiencing their best monthly rally since 1991 and the Canadian stock market since 2009.

So far, May isn’t looking too bad either. But why? Why would markets spring upward while the economy remains in such a deep freeze? The explanation is relatively simple, if often misunderstood:

Economic indicators are in real time. Unemployment is high right now. Government debt is piling up. Coronavirus is ravaging our personal and economic health today.
Market pricing is forward-looking. When the market is rising, it suggests there are more buyers betting that things are likely to improve than there are sellers betting on even darker days ahead. This doesn’t mean they’re correct, but relatively efficient markets often do “know” a bit more than any one of us can know on our own.

Market efficiency

This leads to another source of confusion for investors and the popular press alike:

The markets can be crazy-volatile in the near-term. Nobody actually knows what market prices are going to do next: not even the market itself. To know, we’d first need to correctly predict each new economic or other trends that might change things. Plus, we’d need to know how the market is going to react to the interplay of every force, combined. No wonder it may often feel as if the markets are disconnected from reality. Continue Reading…

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