Friday, November 17, 2017

You Don't Have To Be Worried About Money

But about half of Canadians are: read Rob Carrick in the Globe and Mail "One in two Canadians is a bundle of nerves about money".

At High Rockwe do Wealth Forecasts (prepared by our Certified Financial Planning , CFP, professional) for all of our clients: from ages 25 to 85 (because we also have multi-generational families that we are working with) before we even begin to discuss investing strategy and there is no obligation to work with us if we are not the right fit.

We leave that for you to decide.

However, we also know that a Wealth Forecast is not worth the paper it is printed on if it is not regularly monitored, updated and the accompanying investing strategy adjusted to ensure that whatever goals you have are within your reach.

So that is what we do.

We can set up automatic withdrawals into your investment account from your bank account so that you can become comfortable with the payments and it just becomes part of your regular monthly cash outlay.

We can't force you to save. You have to take that initiative, but we can help you get it started, by creating a plan and helping you steward that plan forward.

It costs you less than many mutual funds do, so it is cheaper than what most banks can offer.

And it is personal (not robo) service.

Help yourself if you are in the 47% of "money-stressed" Canadians. Our clients sleep at night. It is amazing what seeing your net-worth projection can do for you and how much it can motivate you into believing that your financial goals are achievable.

Wednesday, November 15, 2017

10 Years Of Globally Diversified Balance

On this week's High Rock Weekly VideoPaul and I briefly discussed the long-term returns that we use to justify our expectations for long-term client portfolio growth assumptions.

We think that a portfolio of a blend of our 3 models should be able to achieve somewhere in the vicinity of 5-6% average annual growth over a multi-year period (before fees and taxes).

I thought I might go into this in a little more detail:

As we are reasonably close to the end of the 2007-2017 investment cycle (peak to peak), if we look at a global equity index (I normally like to use the MSCI All Country World Index, but there wasn't quite enough Bloomberg history, so I am using the MSCI World Index , fewer constituent companies, but generally the same idea) over the last cycle:

The 10 year average annual return has been approximately 7.45% in C$ terms (some years better than that average, some years significantly worse). That would represent a globally diversified equity portion of a portfolio.

In a 60% equity portfolio, this is a weighted annual average return of 4.47%.

As for the fixed income component, we can use the Canadian Bond Index ETF XBB:

The 10 year average annual return here has been 4.49%. This represents the fixed income portion. 

In a 40% fixed income portfolio this is a weighted annual average return of 1.80%.

Combining both of these gives us a total annual average return over the cycle of 5.87%.

Of course, historical returns are no guarantee of future returns, but can we let this be our guide for our expectations for future returns?

In the future, as we tell our clients, we will likely have some years that fall below the average annual return and others that might exceed the average.

As we take a longer-term perspective, we consider the most important part of our work to be not just getting decent (relative to historical averages) returns, but to get these returns in light of taking reasonable risk.

At the moment the risk free rate of return (a 90 day Government of Canada T-bill, no risk in owning this investment) is a little under 1%. That will not get you much after taxes (interest income is fully taxed at your marginal rate) and inflation (in the vicinity of 1.6%, but depending on where you live and what and how you consume).

So to stay ahead of inflation and taxes, you do need to take some amount of risk with your investments. The type of risk that you take can certainly influence the outcome. That is why we focus on the return per unit of risk. 

Even in a balanced and diversified portfolio, you can get risk that can unhinge a longer-term portfolio performance. Especially when the traditional correlations between equity and fixed income markets are no longer working to protect you.

The past 10 years (including the financial crisis) have hopefully provided you with something in the vicinity of the 5.87% with balanced and diversified investments alluded to above.

The next 10 years may not necessarily do the same because the risks change. Being on top of those changing risk parameters is extremely important. That is what we do to prudently protect our and our clients money: find good opportunities and understand the risks inherent in them.

Friday, November 10, 2017

Under The Heading: What On Earth Can they Be Thinking?!

As will happen from time to time, I get to meet some bright young people (often referred to me by one of our clients) and engage them in conversation about their current investment situation (as was the case earlier this week). As is often their situation, they are hard working (at their chosen profession) and have little time (or have had little time up until now) to explore and learn more about their savings and the possibilities for building and managing their wealth. Usually, they have trusted an institution (usually a bank) to assist them with the growth of their savings.

Most are relatively conservative about the type of risk that they should be taking (which is why they have ended up talking with me) but also realize that to stay ahead of inflation in the longer term, they are going to have to do better than low yielding GIC's.

They often have a somewhat difficult time getting hold of their bank advice giver to find out exactly what their returns have been and what fees they have been paying.

CRM2 (the legislation that requires both $ fee outlays and annual portfolio performance) is supposed to make this easier, but apparently the conversation with their advice giver does not offer up a whole lot of clarity.

I, in no way want to bash the institution above (who I bank with and actually get pretty good personal banking service from) however, if you look closely you will see that this particular mutual fund (which I am using only as one example amidst thousands of others), which their asset management division manages, has 5.6 BILLION dollars under management. 

The cost of the managing of this balanced fund (to the investor who has their money invested in it) otherwise known as the MER is 2.16% (see above) annually. 

If you invested $10,000, 10 years ago (pretty much the full investing cycle, through the 2008 crisis) in this fund you would now have $13,686 (according to the above chart) a little over 3% per year in growth. Likely, you paid over $2,200 over this same time frame just in management fees alone. You probably do not realize that you have paid them because they are listed in the fine print and rarely part of the conversation with the advice giver.

How does 5.6 Billion dollars find its way into paying such an exorbitant amount in management fees?

At High Rock, as an example, we can cut that management cost in half. We run balanced portfolios and charge our clients a management fee of 1%.

So why on earth would anybody pay 2% for a balanced mutual fund that only returns 3% ?

Why are 5.6 Billion dollars (in this one fund alone and there are thousands of these funds out there) doing so? It makes no logical sense.

I would suggest that it is because it is just not being made clear to the investors.

The intelligent people that I talk to, when they finally have the time to realize that their money has not been growing as well as it otherwise should have, can't seem to get straight answers from their bank advice giver.

The straight answer is: you have been paying too much and it is not in your institution's best interest to tell you. So they don't. They hem and haw and avoid directly answering the question.

At High Rock we don't avoid the question. Which is the way it should be: total transparency above and beyond the CRM2 requirement. You can also throw in great client service and fiduciary responsibility as well. We not only try to get the best risk-adjusted returns, but also save our clients money in fees and costs.

Ask the tough questions. If you don't get good answers. We have them for you.

Monday, November 6, 2017

Finding Investing Opportunities In A High Risk World.

According to President Trump, he is responsible for the stock market rally and the record highs that it has achieved (more here:

Others might suggest that corporate earnings are responsible, although it may depend on how you look at those earnings and whether or not they are over-achieving or not.

We won't get drawn into a political debate (we remain politically agnostic) and we have our opinions on earnings and their expectations being more than built into current pricing. 

Current pricing is suggesting some 30% annual average earnings growth above the 10 year average over the course of the next year: 12 month forward looking Price to Earnings ratio is 18 times, the 10 year average is 14.1 times, which includes expected earnings growth of 10% over the net year). With economic growth of just above 2% (12 month moving average) as we discussed in last week's High Rock weekly video, we see this as a stretch. In other words, buying the S&P 500 ETF at this point in time would not be prudent as it is fraught with the risk that it may not meet investor's very high expectations. 

You may have to click on this (above chart) to enlarge it, but the message is clear, investors are being emotionally driven by the psychological biases that always appear in their behaviour.

That is a trap that we do not want to fall into.

That does not mean that we are not continually scouring markets for opportunities: When the C$ over-reached in late summer, we used that opportunity buy $US. When the Canadian equity market was the worst performing developed stock market, we decided to add to our holdings and when General Electric broke below $20 last week (down almost 40% from late 2016's highs), we put a little of our $US to work.

Everything we do is measured and relative to our return per unit of risk targets. 

When US equity markets get cheaper, we might add to our holdings of them. However, until that time, cash (or cash equivalent high interest savings funds) represent a tactically prudent alternative.

Meanwhile, both Canadian and US 2 year to 30 year yield spreads are narrowing, close to their lowest levels since 2007 / 2008:

Historically, when these curves flatten, a recession is not far behind. The US Federal Reserve is expected to raise interest rates in December and March, which would likely see this narrowing further (short rates higher).

Lots to concern us, so we need to be particularly careful (which is what our clients would expect us to do).

Friday, November 3, 2017

Truly Great People!

I am somewhat blessed in my life because of the nature of my job. I get to meet some really fantastic individuals from many different situations: artists, authors, athletes, media personalities, executives who run large corporations and executives who run their households, small business owners, economists, medical professionals, legal, accounting and educational professionals and those who offer up their passion to public service and charitable work. Some continue to ply their trades, some have moved into different chapters of their lives. 

The one common denominator is that they all have tremendous experience in their backgrounds and I love the vast amount of collective knowledge that they have attained through their lives.

My High Rock business partner Paul and I started our Private Client Division almost 3 years ago, with a very simple motivation: quite simply, we wanted to offer those interested in investing the way we invest our own and our families money (which we do rather well, I may say) and provide them with the same sort of stewardship that we apply to our own family wealth. We also wanted to do it as openly and transparently as possible, especially when it comes to fees.

Trust is a leap of faith, at times. It takes a long time to build and can be easily broken. We were fortunate to have a number of folks who trusted us right from the get go, that allowed our dream to evolve. For that we are truly grateful. The good news is that some 3 years down the road, they are still with us.

Recently, we decided that we could still grow our business further without compromising our ability to serve our clients and perhaps build more scale whereby we might be able to continue to reduce our costs and pass those on to our clients.

For these purposes, we asked a select few of our highly knowledgeable clients if they would be interested in advising us on matters of technology, marketing and other investment issues.

And so, we have added what we consider to be a brilliant "brain trust" of sorts to establish our advisory board to add their expertise in matters that we may not be so expert at. Our expertise is in wealth and portfolio management and we want that to continue to be our focus, so to have the additional support in growing our business is wonderful and greatly appreciated. 

If you wish to visit our website you can click on the various individuals to see who they are and a bit about them.

We do have so many gifted and talented clients that we are always open to your input. If you wish to get in touch with any feedback, we are wide open to it, so please feel free to email me

Wednesday, November 1, 2017

Another October In The Books (And No Crisis)!

In fact, for one of the historically most volatile months, this October has seen record lows in the Volatility Index (VIX), now sitting just below 10. If you remember 2008, volatility set record highs (above 60 on the monthly chart above).

As we briefly discussed on our High Rock weekly video (formerly known as our weekly webinar), yesterday: Central banks do not like volatility because it erodes confidence, both at the business and consumer levels, and when they are not confident, businesses and consumers postpone making economic decisions, which in turn negatively impacts the economy.

So central banks pumped vast amounts of liquidity into the global financial system (by purchasing bonds from the bond market) after the financial crisis in an effort to combat the surge in volatility that followed.

It has worked. Consumers are the most confident they have been in years (certainly in the US, chart below):

Investors are extremely confident as well! Stock markets in the US are pushing record highs (gold line in the chart below):

Bond markets (the white line) are being held by continuing low inflation.

So that is all history.

Our job as risk, portfolio and wealth managers is not to dwell on on what recent history has provided us, but to look forward to try and find the potential risks that lay in wait somewhere down the road.

Looking at the 30 year chart of volatility index (back at the top), there is a pretty clear pattern that evolves over time: a swing from higher levels of volatility to lower levels and back again.

Suffice it to say, there is a pretty strong likelihood of this pattern repeating. Volatility rises when uncertainty rises, but for the moment, central banks have reduced the impact of uncertainty (of which there is no shortage, at the moment).

Volatility spikes come when new and previously unidentified shocks (economic and / or geo-political) surprise financial markets.

Our job is to be on guard for impact of those shocks. 

Having balance between equity (stock investments) and bond investments has historically proven to mitigate at least part of a spike in volatility. In 2008-2009 a 60% equity portfolio and 40% fixed income portfolio probably dropped about 15%, or thereabouts, before beginning its recovery.

At current levels, low yields on bonds and record high stock prices, that correlation no longer can offer the same protection (more on this here:

That is why (at High Rock) we advocate a more tactical approach to investing, because our duty to our clients (and our families, because we invest in the same assets as our clients) is to try to protect them, as best we can, from the ravages of volatility, which are not only potentially financially devastating, but also psychologically devastating as well.

Being defensive means that you won't likely get the double digit growth that stock markets offer when they are making record highs (although High Rock clients may notice that October added nicely to their portfolio growth). However, it also limits the potential downside, which, over longer periods of time, allows a more even and predictable growth pattern.

That is the stewardship of wealth rather than the "rolling of the dice".

Saturday, October 28, 2017

What Are You Paying For And what Are you Getting In Return?

Congratulations to Mr. Pinn (above), who according to a recent Globe and Mail article on Robo-Advisors (by Clare O'Hara) discovered "that he was paying more than $20,000 a year in fees" (on a portfolio of $500,000) and "decided to fire his investment advisor of 18 years". The article goes on to suggest that he has now gone from paying fees of about 4.0% to fees closer to 0.4%.

Everybody needs to take a very hard look at what it costs you to invest and what it is that you get for the fees that you pay.

If "Robo" is the way you want to go, have at it. But it is important to remember that you will get what you pay for.

Don't expect to be high on the priority list from a client service perspective, because you are not paying for it (see my July 20 blog: The Robo-Advisor Option).

If you want a truly excellent client experience and a plan (created, monitored and administered by a Certified Financial Planning, CFP professional) that sets out and truly defines your very tailored investment strategy (with direct access to the managers who implement it), also monitored and adjusted as your circumstances change (and they will, because life is very dynamic) you can get it for a bit more (but not much more) than Mr. Pinn is paying for his Robo-experience. You certainly do not need to be paying 4% or even 1.5% to a financial / investment advisor who might stick you into a bunch of mutual funds (or even ETF's, as I wrote about in my most recent blog, last Wednesday).

After the volatility of early 2016, stock markets have been pretty good to investors (and volatility has fallen to new lows), but balanced portfolios have been broadsided by both bond market performance and the C$ strength, especially if you have global diversity (which you should have) and exposure to foreign currencies by virtue of that diversity.

Stick-handling that risk requires both experience and expertise. You probably (if you choose Mr. Pinn's path forward) want to ensure that your Robo portfolio managers have the required capability to handle that risk because as we know from history, volatility can jump when you least expect it and unprepared portfolio managers can get blindsided (and so can your portfolio).

I certainly do not want to take anything away from Mr. Pinn's wise decision to research his costs and make the tough decision to end the 18 year relationship with his over-priced advisor. I wish that every bank and large investment dealer client would be so brave.

However, the next step, choosing the most appropriate investment counsel for yourself and your family is also extremely important.

Make certain that you are getting what you need, relative to what you are paying for.

There are lots of alternate choices and portfolio management companies like High Rock, who fly beneath all the advertising hype out there, that are worth looking into.