Tag Archives: investing

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…

A philosophy to help investors cope in this uncertain time

Posted By Financial Independence Hub | April 27, 2020

By David Miller, CFP, RFP

Special to the Financial Independence Hub

If you are feeling uneasy about your financial situation and your investment portfolio, you are not alone.

Our lives have changed. Right now, most of us are working from our home offices, suddenly teaching Algebra and Social Studies to our kids, and watching more Netflix than we should. Healthy behaviours have hopefully changed for the better, with extra hand washing and social distancing. Shaking hands may be a thing of the past.

The economy, for the most part, is shut down, so does that mean your investment behaviours should change too?

That depends …

What kind of Plan have you committed to?

If you have an investment plan that looks to take advantage of the low prices during a downturn and if you have stuck with it during this unprecedented time, kudos to you! The panic selling during March 2020 dropped the S&P 500 (the ‘top’ 500 listed companies in the US) by 36%! Scary stuff that made a lot of people feel stressed out, and it feels like it could get worse. But let us check that feeling with historical facts.

March 3rd, 2009 was the technical bottom of the 2008/09 Financial Crisis, but no one recognized it until much, much later. Here is a quote from CNNMoney.com from that day 11 years ago; note the language:

“I think people are at a loss for answers right now,” said Larry Glazer, managing director at Mayflower Advisors. “Investors are mentally exhausted, and the market at multiyear lows has a psychological impact.”

He said it’s possible that the declines are part of a cycle the market needs to go through to get to healthier footing, but that, regardless of that, it’s very painful for investors in the near term.

“This is a risky market and investors need to ask themselves if the stocks they own are ones they want to own through an extended downturn,” said Robert Loest, portfolio manager at Integrity Funds. “If not, they should be raising cash.”^*1

This language seems similar to the sentiment around today’s markets. Today is a much different situation but much of the same fear-based feelings are predicated in the media every day. I’m not saying that we’ve already seen the market bottom of this unprecedented event, but if you had followed the advice of the Portfolio Manager above and picked March 3^rd, 2009 to sell your investments and raise cash, you just lost out on the best possible day to invest for the next 11 years. Just as no one could have predicted March 23rd, 2020 would be the day the markets would rebound for 20+ days after, even amid worsening Pandemic numbers and an evolving oil crisis.

Table 1: S&P 500 (CAD Hedged) vs. Canadian Short-Term Bonds

The point is, no one knows where the market will go in the short-term. A lot of the market movement is based on fear and greed, not grounded economic reality and fundamentals. Holding a long-term view and a strategy to buy into these short-term panics is vital to investment success.

As an investment firm, we took a cautious approach that last week of March, dipping our toes into the water, selling only some of the short-term bonds that we hold and buying into the down markets. We did not buy exactly at the bottom, but we were close, buying near a 30% discount from February’s highs. If the equity markets drop down again, we will sell more of the safe assets and buy equity again.

What allows us to buy near the bottom during a panic? For each of our clients, we build a holistic strategy that includes a written commitment in the form of an Investment Policy Statement.

“Writing down your goals means that you can visually see them. This is an important point because when we see something, it affects how we act.”^*2

The Investment Policy Statement

Simply defined, an Investment Policy Statement (IPS) is our guide to how we invest your money. It lays out, in writing, your long-term goals, risk tolerance, methods to invest, expected long-term rates of return, downside risks, and corresponding asset allocation targets. Continue Reading…

7 timeless strategies investors need to remember in this time of market turmoil

Posted By Adrian Mastracci | March 31, 2020

The world as we knew it suddenly changed. What a surprise beyond belief for all of us.

There was no announcement six months ago. There was no new or updated playbook for any of this upheaval.

A harsh pandemic is a sure way of turning lives upside down. Treacherous times are firmly entrenched as the new roadway.

Stock and bond markets march at will in both directions. Investors wonder whether they are closer to a market bottom or to a top. All sorts of fears and worries are sprouting everywhere.

This is a reminder for all to go slow: younger and older, novices and seasoned. Try your utmost to use all the investing common sense you can muster. Sitting on your hands is often a worthy move.

My strategies:

Accordingly, I have selected seven timeless strategies that every investor ought to be familiar with in detail. They form a solid foundation for guiding the family nest egg.

I’ve kept them brief and to the point for the sake of simplicity. Here is my summary of critical strategies:

1). Short term trading is best suited for your “speculative” money. Conversely, long term investing is the best fit for your “serious” money, such as funding retirement. These two portfolios are constructed differently, so don’t mix them.

2). Chasing returns has been far from a consistent winner. Instead, pay attention to acquiring broadly diversified “quality” investments. These portfolios typically fare better during bouts of market turmoil.

3). Set aside the could’ve, should’ve and would’ve schools of hindsight. Make your decisions based on available information and move forward. Looking back in your rear view only creates distractions you can’t do anything about.

4). Becoming attached to your stocks is akin to making emotional decisions. Instead, I recommend pursuing logical moves designed to embrace your best interests. Your investing success should improve.

5). Don’t make investment decision out of fears. Rather, wait until the coast begins to clear. You have absolutely no control over what happens to market fears.

6). Decide whether you seek the return “of” your money, or the return “on” your money. That strategy sheds light on the fit of your desired portfolio. It also keeps you better invested within a more comfortable asset mix.

7). Investing your money all at once is usually not a preferred strategy. Studies show that asset mix delivers the biggest impact on portfolio outcomes. Neither superior stock selection, nor timing of purchases are close seconds.

My premise:

My premise is that investing strategy need not be complicated. I recommend that the main ingredient is always plenty of patience combined with common sense. Focus on logical and sensible approaches that contribute to your discipline. Continue Reading…

Aman Raina’s 5-year Robo advisor review — and how Robos are holding up in the bear market

Posted By Financial Independence Hub | March 27, 2020

By Aman Raina, SageInvestors.ca

Special to the Financial Independence Hub

NOTE: This review was initially undertaken using data compiled as of January 30, 2020, which marked the 5-year anniversary during which the portfolio was active but prior to the severe market turbulence that occurred in February and March 2020. As it became apparent that the market pullback was becoming an epic meltdown, additional data was compiled and included into the review.

Five years ago I embarked on a personal experiment. I was having a hard time getting any insights on the effectiveness of a new investment services that was shaking the ground at the time in 2015.

Known or labeled as Robo Advisors, these new wealth management companies offered services to invest on behalf of others using an online platform and a combination of algorithms and computer coding to buy and sell specific investments and manage portfolios. Five years ago these firms were just stepping into the investing consciousness, but since then they have mushroomed and even traditional investment companies are now offering some flavor of online investment management services.

It all seemed quite appealing; however, there was one thing that many marketing materials, blogs, and mainstream media were avoiding … do these types of services make money for investors? Is this the type of service that would successfully bring more people, who naturally feel intimidated and frustrated by the whole investing concept into the investing domain?

Since no robo advisor company back then was interested in disclosing their performance (they still avoid it) other than citing research that their low cost/passive oriented strategy is superior, I decided five years ago to try an experiment to get some more insights that did not involve boilerplate marketing speak. I set up an account with one of the “large” Robo Adviser firms and invested $5000 of my own money into it.

My goal was to go through the process and blog about my experience using the service, how the ROBO went about making decisions and how it managed my portfolio, and more importantly, the results. I’ve always said that we need a good five years to really get a handle on how effective these services are compared to traditional wealth management services. Well, I just crossed the five-year mark of my ROBO journey, so let’s check back in and take a look at how it’s been doing. I’ve also said that I would reserve my opinions about this service until we reached that five-year threshold. Well here we are and I’m ready to unload my takes.

2019 was an epic year for stocks. US major stock indexes were up just over 30 per cent on the year. Fantastic returns. Hopefully my ROBO got a good piece of that action.

Performance

Overall, my ROBO portfolio posted a solid year. The portfolio was up 11.6 per cent year over year, a nice rebound from the previous year where it lost 2.1 per cent. Over the 5 years, the portfolio generated positive returns in three of the 5 years, and posted double-digit returns in those three years. The portfolio increased by $707, of which $162 came from dividend income while the remaining $545 came from capital gains. Over the year period, the ROBO portfolio increased from my initial $5000 to $6817, a cumulative return of 36 per cent. Of the $1817 increase, 1/3 was from dividends while the remainders was from capital gains. The portfolio continued to benefit from higher concentration of US and Canadian equities, which again hit it out of the park the past year.

Below is the breakdown of the portfolio. Five years ago when I set up the account I answered a series of questions about my financial literacy and risk tolerance. ROBO took my responses and crafted a portfolio that it felt was compatible with my profile. Continue Reading…

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