Tag Archives: stock market

How alternative investments protect your Retirement in a down market

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By Matthew Ardrey

Special to the Financial Independence Hub

When I review the portfolio of new clients as part of their financial plan, they almost always have at least one of the following concerns on their mind. They ask how long can stocks continue to climb, given it has been an eight-year bull market or how can their portfolio earn any income with interest rates being so low. More often than not they ask both.

These are real concerns I hear from real people I meet. More and more I am finding that traditional investment solutions are not enough on their own.

Consider how our investment world has changed since 1990. In 1990, an investor could purchase a Government of Canada bond yielding 9.9%, invest in equity markets with a 15X Price Earnings Valuation and lived on average to age 77. In 2017, that same Government of Canada bond yields 1.5%, the Price Earnings Valuation has increased to 22X and average life span is 82 years.

Coping with longer lives, low interest rates and inflation

So the average Canadian investor is now facing a longer life, with fully valued or overvalued equity markets and a fixed-income yield that barely keeps up with inflation even before taxes. Traditional investments can offer little in the way of a solution, especially without increasing the risk profile of my client.

This is where alternative investments can add real value to a portfolio.

Many alternative investment strategies provide yields well in excess of the 1.5% bond yield mentioned above, often averaging annual returns in the 6 to 8% range. The income produced from this part of the portfolio can be used to supplement the low current yields on fixed income.

In addition to return enhancements, alternative investments have a very low correlation to traditional investment markets. What this means is, their performance is not meaningfully impacted by changes in the equity markets. This not only provides diversification, but also portfolio preservation in times of negative volatility.

What are alternative investments? They are any investment that is not a public stock, bond or cash security. Some examples would be private debt, infrastructure, real estate and private equity. They invest in private income oriented investments they can generate stable, high levels of income or by using sophisticated equity hedging strategies to reduce volatility.

Alternatives can have barriers to entry

As with all great things, many investors will wonder, “What’s the catch?” Though there is no “catch” with alternative investments, there are barriers to entry for the average investor. The two main barriers to investing in alternative investments are:

  1. High investment minimums because the investor is not an Accredited Investor (has $1 million in investable assets or $300,000 of income)
  2. Many financial firms do not have the specialized skill set to analyze these investments and thus do not offer them

Though these barriers exist, they can be surmounted by engaging with an appropriate investment counselling firm. The advice provided by an investment counselling firm will allow an investor to access the alternative investment even if not accredited. The firm chosen should have a process to identify alternative investment solutions with proven money managers who have strong track records and a disciplined investment process. Thus, they can engage in the relationship with the alternative investment manager on your behalf.

During the past 30 years, pension plans have been achieving some of the highest returns. It is no coincidence that during the same time period their allocation to alternative investments has also increased substantially to enhance returns and decrease volatility risk.

Institutions have tripled allocation to alternatives

According the annual asset mix report produced by the Pension Investment Association of Canada, which reports on the $1.6 trillion invested by Canadian pensions, the allocation to alternative investments has increased from 10% in 1990 to 33% in 2015. This is an increase of over 200%!

These funds hold the financial future of thousands if not millions of Canadians in their hands. The “smart money” is moving out of the traditional investment world into the alternative one. Now you have the opportunity to do the same.

The world was a very different place in 1990. Brian Mulroney was Prime Minister of Canada, Microsoft released version 3.0 of Windows and The Simpsons first aired on TV. It only makes sense that the investing world would have changed since that time too. If your portfolio isn’t positioned to take advantage of the new investing reality, then my only question is what are you waiting for?

Matthew Ardrey, CFP, R.F.P., CIM, FMA is a VP, Wealth Advisor with TriDelta Financial. He has been providing unbiased advice to his clients on their financial planning and investment management needs since 2000. He can be reached at matt@tridelta.ca.

 

The hardest thing about being a stock investor

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Stock market investors face a difficult challenge. While long-term stock market returns are quite attractive, in the short-term returns can be quite volatile.

This volatility can be difficult to stomach at times, especially when accompanied by worrying news flow.

Adding to the angst for Canadian investors can be the volatility of the Canadian dollar, yet it makes sense for Canadians to diversify globally.  It is important from time to time to review the historical evidence to help us manage our behaviour and stick with our investment plans.  Let’s review some of the long-term evidence:

Evidence*

“Long-term stock markets returns are quite attractive”

  • The average annual return of the S&P/TSX Composite index of Canadian stocks over the 60 years between 1957 and 2016 is 9.1%
  • The average annual return of the S&P500 index of large cap US stocks over the 91 years between 1926 and 2016 is 10%
  • The average annual return of the MSCI EAFE index of developed market stocks outside North America over the 47 years between 1970 and 2016 is 9.1%
  • Exposure to small-company stocks and low-valuation stocks has led to higher performance levels than that of market capitalization weighted indices over long periods of time

“In the short-term returns can be quite volatile”

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How Far is the Stock Market Likely to Fall?

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Robert S. Cable

By Robert S. Cable, The Cable Group

Special to the Financial Independence Hub

For the vast majority of people, investing will, at times, become emotional. We may hope for the market to pull back into what is referred to as a “healthy correction” but when this ultimately happens it never feels healthy.

When we see our portfolios drop in value and the press trot out stories comparing today to the market tops of 2000 or 2007 or even the 1987 crash, we begin to think in terms of worst-case scenarios or even worse than worst case.

We’re conditioned to think in terms of extremes. We’re either at a market top and about to crash or less often, because fear is a stronger emotion than greed, near a market bottom and the market is about to soar. These extremes do occur and they’re always possible but the reality is that it’s unlikely we’re at one today because these extremes are indeed rare. There’s simply a lot more back-and-forth movement to the markets than the average investor recognizes.

It’s inevitable that we’re going to see the market fall 10% in the not too distant future. This happens more often than you likely think it does. Does this mean it’s the start of another 50% market crash? Maybe, but not likely.

Let history be our guide

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Volatile, Unpredictable … and entirely Normal

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Kara Lilly

By Kara Lilly, CFA

Special to the Financial Independence Hub

Stock markets have been jittery lately.

After improved sentiment last quarter, investors now appear to have heightened concerns. Not only have fears around China resurfaced, stoked in part by downbeat economic data and circuit breaker sell-offs, but weak global commodity prices also continue to elicit concern. Oil now sits below $30 per barrel, while the VIX index, a measure of volatility in the S&P 500, remains at an elevated level (approximately 29).

A lot has been going on in the global economy…enough that some shops have issued dire warnings of the days ahead. But while recent events do appear negative—insofar as they represent bad cards that have come up—they are not wholly surprising; the risks around China and weak commodity prices have been known for some time. Moreover, they warrant neither a kneejerk reaction nor panic.

Investor apprehension in this environment is both understandable and natural —and we must ensure it does not hijack us.

Markets are always volatile and unpredictable

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Volatility is a natural part of investing

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Bull market risk financial concept as a heavy bullish beast walking on a high tightrope shaped as a stock market profit chart representing the investment danger ahead.

By Ermos Erotocritou, CFP, CPCA 

 Special to the Financial Independence Hub
 

After a lengthy period of stock market gains, volatility has once again returned to the markets. While volatility can be unsettling, it’s important to remember that it’s a natural part of investing. In fact, it tends to occur far more frequently than most people realize.

Since 1956, there have been 22 occasions when the TSX declined by more than 10%. When you calculate the average of each of these occurrences, you discover that we have experienced an average decline of 19.5% every two and a half years.

Yet the S&P/TSX has delivered an annualized return of 9.2% since that time and has proven to be quite resilient through the worst market conditions that have occurred. Despite the frequent occurrences, the market has always recovered, achieved a higher level, and rewarded those investors who remained patient and stayed true to their investment plan.

Keep a long-term perspective

This stresses the importance of maintaining a long-term perspective. Volatility often causes panic and fear, which leads to investors making regrettable decisions, like liquidating and consequently locking-in investment losses. We need to accept volatility as being a common occurrence on the road to achieving our financial goals. When we consider the natural trajectory of the market is upward-sloping, it becomes clear that maintaining a long-term approach is really the best strategy to effectively deal with these inevitable declines.

As simple as this advice may be, it’s sometimes difficult to accept when the headlines scream it’s time to get out. There is vested interest in pessimism. No journalist ever captured the front page writing a story about how disaster was unlikely to occur.

Short-term market movements are mere “noise”

While it’s reasonable to monitor day-to-day events, it’s important to keep in mind that daily, weekly, monthly, even quarterly market movements are often little more than noise for an investment portfolio that likely has a time horizon of many years. That’s why it’s so important to practice patience and discipline by remaining in the market, as opposed to abandoning it believing that is the best way to preserve wealth.

There is no guaranteed formula to identify when the best and worst time to be in the market is. However, ensuring your portfolio is well diversified and by sticking with a long-term plan, the volatility you may experience today will become a distant memory as you work towards achieving your financial goals.

Warren Buffett says “The stock market is a device for transferring money from the impatient to the patient.” My advice to you is to remain patient, it will get better.

It’s times like these that people have lots of questions. Feel free to pass this blog on to friends and family that you think may benefit from this information. I will make myself available to anyone who wants to ask me any questions. There is no obligation to meet with me or become a client. It’s important that people are educated and don’t end up making a decision they will regret later.

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