Thursday, August 17, 2017

In A World That Demands Instant Gratification, It's Hard To Sell Boring

In my world, boring is good. 

A slow, steady, gradual, low volatility, predictable rate of growth is a good thing.

Now, of course, we are competing with those that want to tell you that you have to do something and you have to do it now or you will miss out on the big opportunity that awaits you!

They are selling excitement!

It's easy to buy excitement because it is entertainment and we all know that we want to be entertained!

Speaking of which, I just finished season 1 of Dwayne Johnson as Financial Advisor Spencer Strasmore:


Or perhaps even more exciting is Jason Bateman as Financial Advisor Marty Byrde:


Now these guys sell excitement (comedy and drama)!

They even talk it up like a few financial advisors I have witnessed in my past, you know: "grab the opportunity now" (and other standard financial advice cliches) kind of stuff.

But, alas, the real world is not like that (not the one that I know anyway). 

Here it comes, you may be thinking, he's going to say something about planning...


You are correct. How boring is that?

So many folks don't have a plan. You need to have a plan before you can take advantage of any exciting "opportunity" because you need to be able to figure out how that opportunity is going to fit into your future.

But its August, its the summer, its just not the right time.

Ok, so should we wait until September? If you have kids, then that is such a good time because you won't be running around with back to school issues? Perhaps October? Maybe after Thanksgiving, or November, such a boring month! Not December, way too busy. January? Yes, to start the new year!

And before you know it another 6 months passes on by and there is no plan.

Obviously that little lecture is not for High Rock clients, because they all have plans and are well on their way to having their portfolios built, achieving their goals and getting a wonderful nights sleep (that is where boring is very helpful) in a methodical, disciplined way.

If you think that gambling is exciting, then you should take a trip to Vegas (but keep in mind that the "house" has the odds stacked heavily in its favour).

If you want to be a steward of your families financial future, then you are going to have to get a plan together. 

Be fearful of the exciting sales pitch. Go with the boring folks, who talk about how managing risk (and cost) is their biggest priority.

Tuesday, August 15, 2017

With Casino Capitalism On The Rise: Stay Prudent

John Maynard Keynes : "When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill done".

I did not come up with this on my own, but had help from James Mackintosh of The Wall Street Journal.

Nonetheless, following up on, in what we would consider to be a time of high risk (last Wednesday's blog), volatility spiked last Thursday as the political rhetoric between the US and North Korea heated up and slipped lower on Friday, yesterday and further today as it cooled down:

Traders and speculators (gamblers) have been whipped into a frenzy. They like volatility because it frightens the retail (individual investor) and they are keen to take advantage of those that get frightened by the wild market swings.

The problem, at these late stages of the economic cycle, is that investing (finding value in an asset for the purposes of receiving a future income stream or appreciation in that value), has little to do with what is transpiring in the stock market.

Reasonable value has long been taken out of stock markets (sometime in 2013) and expected future (12 month forward) prices, relative to earnings earnings are trading at about 17.5 times. Well above the 10 year average of  14 times (24% above).

In fact, with earnings over the next 12 months expected to grow at a rate of about 6.5% and the the price to earnings ratio 24% over its average, earnings would have to grow by an additional 30% to just meet the 10 year average P/E ratio.

In an economy that is growing at barely 2%, that is not likely going to happen.

Another of our metrics of value: Enterprise Value to EBITDA (Earnings before Interest, Tax, Depreciation and Amortization) is at its highest levels since the dot com bubble.

With value out of the equity market in general, it is left to the gamblers to play the trading game to try to find a way to continue to build momentum for stocks to move higher.

Earnings growth is better now, but it was non-existent in 2015 and 2016, yet stock prices continued to rise. Now there is some residual growth, but it is not booming, just catching up. 

The new Trump administration gave hope and hype at the beginning of the year, but that is so far a bust.

Hope and hype and pretty mediocre earnings have fed the emotions of the buyers so far this year, but stocks are expensive and in the end they will return to the mean (average) values as all things do, eventually. Buying stocks at these levels would likely be less than prudent.

We will talk about this and other things financial, economic and wealth management related on our (new format, dialogue version) weekly client webinar today. The recorded version will be posted on our website. Feel free to tune in!

Wednesday, August 9, 2017

I will Say It Again: Risk Is High And Rising!

Yesterday, just as we were about to go live with our weekly client webinar, the President of the United States, arguably the most powerful man / nation in the world, stated that if North Korea persisted in continuing its threats toward the US, that they would be met with "fire and fury like the world has never seen" (Game of Thrones meets Reality TV).

My business partner Paul saw the headline come across his Bloomberg terminal while we were discussing risk (how appropriate) and as one of our clients noted in their feedback to us, "seemed reasonably distracted". Yes, indeed.

We spent a little bit of time on our call talking about the lack of volatility (the VIX index close to its lows) currently in the financial market place which shows the general level of complacency surrounding investors at the moment.

Not since 2015 have we had a serious spike in volatility:

I remarked that, at that time, when volatility spiked, our phones were ringing off the hooks with folks who were frightened by the situation, looking for answers and assistance. Now, a great deal of folks have put their financial and investing risk issues somewhere back to number 5 or 6 on their priority list, because they do not feel any urgency to act.

Paul, on our call yesterday, said very succinctly that: "the time to address risk is now", not when it scares the daylights out of you, by then, it is too late. 

Lucky for our clients, we are always analyzing and measuring  the level of risk and adjusting our portfolios accordingly so that when that next big spike in volatility comes (and it will), we will be prepared (and that, as discretionary portfolio managers, we have the ability to get everybody out of the way of danger instantly and simultaneously, something you won't have with a non-discretionary portfolio manager, who will have to call you first).

Will it be now? With the political posturing between the US and North Korea escalating? Perhaps. Or it could be when a few large holders of equity assets determine that valuations just don't warrant as much risk as there is at current prices. Or perhaps the rising interest rate policies in Canada and the US strip enough liquidity out of the monetary system that selling assets for some becomes necessary.

Or it could be a combination of all three. 

When the very tightly wound elastic band snaps back, it will have some significant repercussions.

Best be prepared.

Thursday, August 3, 2017

Dow At 22,000, US Stocks UP 20% , Not In Your Consolidated Canadian Portfolio

Sorry for the bad news folks, I hope your advisor has been keeping you up to date on your portfolio (if you live in Canada), because despite the advertised returns, 

the US$ recent 10% decline against the $C has wiped out a great deal of those returns for those of you who have consolidated portfolios that are converted back to $C. You may see some declines in your total portfolio in your July statement.

The S&P 500 ETF (SPY) in $C terms has only returned a little over 7% in the past year vs. the over 20% return in $US.

The Canadian Bond Index ETF has returned a -2.5% return.

That will not be good for those of you fully invested in a 60% equity, 40% fixed income portfolio (with exposure to the $US).

Even if you own a hedged  S&P 500 ETF like the Vanguard (VFV)

It has returned only about 7 3/4 % over the last year.

As we discussed in detail on our weekly client webinar last Tuesday, the historically sound correlations between stocks and bonds are no longer giving you as much risk protection as you had in the past.

It is why we feel the need to be tactical is so important.

We have been underweight US stocks and underweight $US.
We changed that a little last Friday when we bought $US at a nice 10% discount from its recent high's vs. the $C.

That is an enormous advantage to our clients: now we have $US to make purchases of US stocks when they get cheaper. In all likelihood, at the same time the $C will likely lose some of its recent strength, but we will already have $US in our and our clients accounts and won't have to buy the more expensive $US.

Fully invested buy and hold portfolios are fraught with risk that many don't fully appreciate.

We do.

Wednesday, August 2, 2017

Just Trying to Make A Positive Difference In This World...One Day At A Time !

When I first (reluctantly) signed up for Facebook (at the behest of my children), some 10 years or so ago, it was basically for sharing family photos.

It asked me a bunch of questions for the "Details About You" section of my bio:

"just trying to make a positive difference in this day at a time" is what I wrote. 

That pretty much sums it up and is what keeps me engaged from one day to the next: my family, my friends and my clients and anyone else who wants to enter my small circle in a positive way.

After I wrote my blog last Friday about the difference between what we do at High Rock and what the other 97% do and why we believe in being bound to a legal fiduciary responsibility to our clients, I posted it on another social media network, Linkedin.

And received this response:

Scott, There is not a single day where I don't feel the safety you are proving enables me to look forward. I am in a way ecstatic I am one of the fortunate few who has a discretionary portfolio manager looking after my family wealth, but then can't even begin to tell you how much I appreciate the fact that my discretionary portfolio manager in particular is recognized by the SIPA as being a "new breed". I remember you and I discussing how there was a net new market forming where those who know the are being fleeced by the 97% of the industry will want a different service. I also remember your vision about building a brand that was based on doing the right thing, doing right by your clients every time and always, always put them first. Many others commented you could not scale, be profitable or that it would be impossible to manage - well, they were wrong, and you were right... And all of us who trust you with our family wealth KNOW IT! Thanks again! Marco

It makes what I do all that much more rewarding!
I love my job!

Monday, July 31, 2017

Putting The Family Into Family Wealth Management

I have spent the last 17 years working with families, with the intention of helping them manage their risks and meet their financial goals.

Most of those goals include creating enough wealth to live out a comfortable life when your income is going to be derived mostly from your savings (or pension plans).

The most successful of these folks, hands down, are the ones who started saving early. It's never too late to start saving, but you will have the easiest time of it if you get going when you are young and the compounding curve in front of you is long.

So we encourage our clients to involve their kids and grandkids as soon as they possibly can and include them in the "family plan". There is something that clicks when you see how putting away (and making a regular habit of it) a few thousand dollars can compound over time to get you into the many millions of dollars goal range.  It is really quite impactful for a conscientious "20 something" to see. I watch their eyes go wide when we show them the possibilities.

Get them started early and in all likelihood, they will achieve earlier independence as well ( a little less burden on your retirement plan).

We handle plenty of multi-generational families and have everything from newborn's RESP's to teenage "in trust for" accounts, which at age 18 become the property of the named child / grandchild and can be a staring point for TFSA contributions, arguably the greatest savings vehicle available because of the tax treatment (there is no tax) on the growth.

Importantly, this usually becomes "untouchable" money, not because we won't let them, but because they get the chance to see it grow, over time and get used to it and there is a psychological effect, wanting to let it continue.

Is it a little extra on our plates (smaller portfolios, additional Wealth Forecasts, less cost-effective for us)? Probably, but in the grand scheme, that is what we are about: the family and helping steward multi-generational families to financial success.

Thanks for all the great feedback...
Please keep it coming...

Thursday, July 27, 2017

Non-discretionary Financial Advice: It Could Leave You Hanging Out To Dry

Only 3% of advice givers in the financial services industry in Canada have fiduciary duty (client first at all times / no conflict of interest) because they have the legal responsibility of being discretionary portfolio managers (see the Small Investor Protection Association report: Advisor Title Trickery). 

That means that most advisors (in the 97%) only have the responsibility to make sure that when she / he puts a client into an investment or set of investments (portfolio), he / she only has to ensure that at that moment in time, they are suitable for that client (objectives, risk tolerance, time horizon).

If, at some point in the future, circumstances change: the investment is no longer suitable for the client or the client is no longer suitable for the investment, that is no longer the advisors legal responsibility, in fact it is left to the client to make that decision (or to take the initiative to ask the difficult question). Really. 

So, in fact, recommending that the client move out of that unsuitable investment is not an obligation for 97% of advisors. 

How comfortable does that make you feel?

In a nutshell that is the difference between non-discretionary advice and discretionary portfolio management. A discretionary portfolio manager (like High Rock) has a legal fiduciary responsibility to her / his client.

So the 97% continue to seek commission revenue, but are not required (legally) to provide anything beyond that initial sale (fee-based or transaction oriented).

It is not the first time I have written about this and likely won't be the last, because, basically it is not fair to the unsuspecting client who's portfolio drops significantly and not until sometime well down the road do they realize that the person they thought was looking out for their best interests is nowhere to be found.

Have you ever heard the line in a portfolio strategy meeting: "if things get ugly, we will get you out"? A non-discretionary advisor won't have the time to get you out (because she / he has to call you first). In a big (non-discretionary) advisory practice how many calls will be made in time? 

A discretionary portfolio manager hits the sell button and everybody is out, simultaneously and the managers own positions are the last out (and closing the door behind them), because fiduciary duty requires that clients are put first.

If you don't want to hear about this from me anymore, just please let me know, directly, I won't be offended (well maybe just a little, but I will get over it).

I don't write this stuff for any other reason than that I care and that I think there are so many vulnerable wealth management clients out there who's advisors are not in it for the client, but rather for their own monetary gain.

It is one of the main reasons that we started the High Rock Private Client Division in the first place: to be different and better. And we are: recognized by the Small Investor Protection Association (SIPA) in their June newsletter as a "new breed".

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