Friday, March 24, 2017

What Is your "Real" Return?

I received an excellent question from a client this week about the difference between "nominal" returns and "real" returns.

Simply put, nominal returns are your actual total annualized rate of return. If your total portfolio return over the last year is 10% and you allow about 1.5% for fees and taxes (taxes will only be those paid on income, dividends and realized capital gains in a non-registered portfolio, as there is none to pay in a registered portfolio or TFSA), then you have a nominal return of approx. 8.5%.

"Real" returns take into consideration the annual increase in your cost of living (inflation).

This morning, Statistics Canada released data that tells us that a basket of goods of consumer items (listed in the above Consumer Price Index chart) which they track for us, increased in price by 2% from last February until February 2017.

The difficulty is that each of us consumes somewhat differently and may not have the same basket of consumer items. To understand our own cost of living and year to year increases, we have to track our own spending habits. 

We try to do this in our client Wealth Forecasts as we track how our clients spend from year to year. However, we have to make assumptions about how their cost of living will adjust into the future (based on this historical input).

If we are a little bit conservative, and estimate the annual cost of living at or about 2.5%, the "real" rate of return would equal your "nominal" return (say 8.5%) less the cost of living allowance (2.5%), which would give you the "real" return of 6%.

Of course, this annualized number is rather simple, but it is relevant because you need to know that you are growing your money at a rate that is ahead of your cost of living and reducing the likelihood of running out of money.

The complexity comes into play as we look out multiple years and take the compounding of both nominal returns and inflated costs of living into consideration.

Hence the Wealth Forecast that we (at High Rock) create and review every 6 months with our clients (our stewardship of your financial health), so that we can understand how these returns are expected to progress in the years to come.

However, it does have to be an on-going process, whereby we monitor how we are progressing against previous forecasts (6 month review) to determine if our investing strategy is driving you to your goals and if we need to adjust our assumptions (like cost of living increase) or the investing strategy itself.

And of course this is a long-term approach to the growth of our wealth, so simple year to year changes are going to be smoothed out over those longer periods of time.

Love to get your questions...

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Thursday, March 23, 2017

Budget: A Reprieve For Capital Gains

However, the trial balloon for an increase in the inclusion rate (% of gains that are taxable) has been launched and this is not an idea that is going to go away. If you have significant unrealized capital gains, you now have some time to plan on how best to capture them while the inclusion rate is still at 50%.

Another reason the TFSA is likely to become an even more important vehicle in the future.

Increased deficit spending will definitely require increased revenues:

If an average or weaker (than expected) economic growth  scenario should evolve, there will be efforts made to find new sources of revenue.

One of the spending measures taken in this years budget allocates a half billion $ to improved tax surveillance and enforcement over the next 5 years. Certainly this highlights efforts to garner increased tax dollars from those who are evading and avoiding paying taxes.

So expect the CRA to be potentially more aggressive in their demands.

Otherwise, there are not too many wealth management issues of significance in this years budget.

Wednesday, March 22, 2017

Living With Volatility (But You Don't Have To)

A case in point: our benchmark ETF ACWI (All Country World Index) opened at a new high and reversed course for a painful -1.5% yesterday. So if your "buy and hold" balanced 60/40 strategy has you at 60% equity, that is akin to a 0.9% swing in your portfolio (to the downside). About $9,000 for a $1mm portfolio. Meanwhile our benchmark bond ETF, XBB (Canadian Bond Index) was up about only 0.01%, which hardly offsets the move in stocks. We have been repeatedly discussing (for those who will listen) how these historical correlations are no longer necessarily reliable and suggesting a more tactical approach to reduce this kind of volatility. High Rock clients looking at their portfolios this morning are likely not too bothered by a significantly smaller move.

If those kind of swings (over 1 day) don't bother you, then you need not read on. If you happen to string a few of them together, however, it might make you squirm a bit because all of a sudden, your year to date returns are not what they were.

Of course, we do as we say and focus more on the longer-term returns and achieving client goals (per each client's Wealth Forecast), which over time, do smooth out the day to day swings. However, if you are human, you may lose a little sleep when you do look at your daily portfolio totals and they have dropped a bunch of $$.

Getting those $$ back (in a "buy and hold" strategy) also takes time, so you may also have to be a bit patient. If you have more cash in your portfolio, however, you not only defend against the downside (cash is a defensive asset), but you also get to take advantage of buying opportunities as prices move lower.

I am certainly not saying you have to move your whole portfolio in and out of cash, but just have a little more of a tactical approach (which we certainly have at High Rock. It may help you get to your goals a little faster or allow you to have a little more $$ in retirement than initially forecast. It might also help you sleep better at night.

Now how can you argue with that?

Yesterday we held our weekly client webinar which discusses our rationale in a bit more detail (so our clients can get a little insight to our thought process). The recorded version can be accessed here: Feel free to have a listen.

Monday, March 20, 2017

Guarding Against Complacency

Political uncertainty is at its highs, but volatility measures suggest that equity markets don't care.

Over the weekend, the meeting of G20 finance ministers could not agree on previous wording to "resist all forms of protectionism" (largely based on the position taken by the US) for their communique. For the global economy, this was not a step forward.

Consumer confidence has been rising (at or close to pre-recession highs), according to recent data and as we all know, the consumer is about 2/3 of the US economy.

At the same time, indications of Q1 GDP are suggesting that growth is not following the consumer's confidence higher (at the moment only a rate of growth of 0.9% is anticipated). Consumers have not yet translated confidence into spending.

The US Fed is confident because they are raising interest rates.

But the yield curve is flattening. Historically, a flat yield curve has been a good indicator of recession to follow, but at the moment we are not there, yet.

 Equity valuations are fully anticipating the benefits of US tax reduction and infrastructure spending although the health care issue (repeal of Obamacare and implementation of a new American Health Care Act) has stalled the process.

Investors have become used to shrugging off the "shocks", preferring to stay with the growing risk in their portfolios.

But risk is growing (despite what has been a muted reaction to it). In fact, it has been growing steadily since investors  decided to jump into the "Trump Rally".

Our job as portfolio managers is to assess the investing environment and prepare our client portfolios for the impact when investors decide that they no longer like the risk that they have.

That means looking behind the headlines and into the emotion that is driving investor sentiment:

When portfolio values are rising, wealth and risk management are low on the scale of family priorities. Oddly, that is when it should be the highest (because risk is high and rising). 

So we (at High Rock) are standing watch for our client families, making sure that their financial futures are not put in jeopardy.


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Wednesday, March 15, 2017

We Have All Been So Naive

Friends, the Canadian banks have been taking advantage of us all on so many fronts. Problem being is that we have been brainwashed with so much "goodwill" for so long that we all don't realize that there are other options.

They have so much political clout and so many dollars afforded to their marketing that they are able to convince us that they are the only safe and secure option and that all the fees and service charges are worth our while.

They are good corporate citizens, they do give back to our communities, but it is our money paid in the billions in annual earnings that they garner for their shareholders (and themselves, because all the senior exec's are shareholders) that we appear to be so complacent about.

There is plenty of safety in many other financial institutions: the Canadian Investor Protection Fund (CIPF) protects our High Rock clients (whose accounts are held at Raymond James Custodial Services) for up to $1 million per account.

So the fallacy of Canadian banks being the safest place to hold your money is just that: a myth.

Of course you have to have trust in the folks that are working for you. The Canadian banks would have you believe that they have that ingrained into the ethics codes of their institutions. I have dealt with some very good people in my day at those banks, but I have also worked with some very unethical people in my day as well, and I was a Branch Manager, so I saw it, up close and personal.

The news is telling us that their greed (sales targets that are apparently unrealistic) is in conflict with their ethical standards.

What is the difference between being "sold" financial products and engaging in a trusting partnership that will guide you through your financial future?

The problem is that most folks do not know that they have an alternative. But they do. There are plenty of us who actually want to work for them and give them all of the great service, wealth and portfolio management that they require and deserve: safely, securely, with care and with their interests as our absolute priority. 

At High Rock we are held to incredibly high standards imposed on us by our professional designations:

We are governed by the CFA (Chartered Financial Analyst) Institute Code of Ethics and Standards of Professional Conduct which are fundamental to the values of the CFA Institute and essential to achieving its mission to lead the investment profession globally by promoting the highest standards of ethics, education and professional excellence for the ultimate benefit of society.     

Our Certified Financial Planning (CFP) professional is bound by the CFP Board’s Code of Ethics and the 7 Principles that form the CFP Boards Rules of Conduct, Practice Standards and Disciplinary Rules: Integrity, Objectivity, Competence, Fairness, Confidentiality, Professionalism, Diligence.

And of course we have to answer to the Ontario (BC, Alberta and Saskatchewan) Securities Commission(s), who impose a fiduciary duty upon us (as do all portfolio managers, accountants and lawyers), which we gladly adhere to.
There is an alternative and it is time to seek out the better option.

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Tuesday, March 14, 2017

To Get Rates Up, Fed Needs To Drain Liquidity

This is slightly technical, but I will do my best to explain:

 Short-term interest rates are controlled by the central bank but they are a function of the market for short term (usually on an overnight basis) loans and deposits between banks.

Everyday a bank looks at its cash position (daily cash flows from deposits and withdrawals by customers) and determines whether it needs to increase (borrow) or decrease (lend) the cash.

The central bank creates the appropriate amount of liquidity in the system to allow them to do so.

If there is an abundance of liquidity (as there has been because central banks have been maintaining a low interest rate policy) then interest rates for this day to day borrowing and lending are rather low.

However, when a central bank wants to raise interest rates (as the odds expect the Fed to do so tomorrow), they reduce the amount of liquidity in the system which makes the cost of the day to day borrowing and lending rise: (economics 101) supply of money available goes down, the cost of money goes up.

The reduction of liquidity, likely in the billions of dollars, has reverberating effects across the financial system and financial markets. Borrowing becomes more expensive. For those who have borrowed to invest (we call this using margin and as is shown in the above chart it is at record highs) the increased cost becomes an issue.

As financial institutions scramble to find the necessary liquidity to maintain their cash flows, there is a greater likelihood that they will sell expensive assets to raise some of the cash required, instead of borrowing more.

What assets are expensive?

At the risk of sounding repetitive, US equities are.

We will discuss this and other global economic issues and how they impact our decisions on investing for our and our clients portfolios today in our weekly client webinar, which is just one of the ways we (at High Rock) keep our lines of communication with our clients open. We will post the recorded version on our website at or about 5pm EDT today.

For Wealth Management, there is an alternative to the traditional Advisor channel and we and our Disciplined Investing strategy are it. 

Feel free to tune in to find out why.

Saturday, March 11, 2017

Pressured To Sell

Selling is a difficult business.

In large institutions there are layers of management each with revenue targets and inevitably it falls down to the "front-line" folks who are given their "quota's" and the "good" salespeople survive and the others have to go find something else to do.

I know this, I am not a "good" sales person.

Let me define good: In the financial services industry it is all about "gathering assets" (getting new clients and their savings in the door) and generating revenue from those assets. 

When I started out in Wealth Management in 1999, I did it with the desire to help people who wanted my experience in managing risk in an investing world that was, at the time, becoming increasingly more difficult with a whole new level of greed driving the "dot-com" bubble.

My advisor "training" program, interestingly with a bank who has just popped up in the news, was more or less a course in selling. Selling bank manufactured mutual funds with big MER's and for me commissions in the form of "trailer" fees (the portion of the MER paid to the advisor as long as the client stays in the fund).

I had 3 years to "gather" $15,000,000 in assets. However, gathering was one thing (I was able to build AUA, assets under administration, to about $60,000,000 before I left in 2003), but the real pressure came from generating commissions. The "grid" was skewed to pay those who were able to generate the most revenue. The more revenue generated the greater the % of  that revenue I would receive. That meant selling, not helping people manage risk.

Anyway, that is the nature of the financial services business and for the banks in Canada, this is the growth area and these large financial institutions with excellent brands of supposed "safety" and ethics are pressured to grow to satisfy their shareholders. The nature of the selling practices of these institutions is inevitably going to breed "bad practices" (front line staff who need to hold on to their jobs). In the US it was Wells Fargo. There is never just one cockroach.

Fast forward to 2015.

We started High Rock Private Client to truly help our clients plan and grow their wealth away from the pressure of banks and advisor selling tactics.

We will always put our clients interests ahead of our own. This is part of our "voluntary code of conduct" but is also part of the duty imposed on us by the Ontario (BC, Alberta and Saskathewan) Securities Commission(s).

Banks do not have that.

We are employee owned. We have no shareholders to report to and revenue targets to meet (or grids to compete on), so that we can focus on what is the most important aspect of our business. You. The client.

There is an alternative and we are it.


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