A Reader / Client Asks:
How Can We Ever Expect To Get Back To 7% Average Annual Returns?
As all questions are, this is an excellent one because at the moment, for planning purposes, it is hard to imagine getting back to those returns in the years to come, given what we are currently experiencing.
Behavioural Finance 101: people will project the current situation long into the future. That is just normal human behaviour.
Everything economic is cyclical, we shall in the future, as we have in the past continue to cycle through economic periods.
The timing is the tricky part.
The academics will tell us in study after study that "timing" the market is perhaps successful in some short-term periods, but over the longer term, it is not as successful as a broadly diversified and balanced portfolio that is built to ride the waves of volatility.
Many failed to either get back in or stay the course through 2008 and as is always the way, most of the selling occurred right at the bottom of the market when the "pain" was too great to take any more. We humans are averse to pain.
The sceptics missed the rally for the next few years, piling back in in 2014 and driving stock prices to way over-valued levels (in my humble opinion) encouraged by low interest rates (chasing higher returns by taking greater risk) and share buy backs.
Now that seems to be coming apart. Equity prices in many cases are at or below 2014 levels.
In general, the bulk of your portfolio (the "core") should be devoted to the balanced and diversified stuff.
However, there is also some room for a more tactical approach.
My brilliant business partner Paul spends countless hours using his CFA and his business acumen finding value in small and medium sized companies, be it in their high yield bonds or their common and preferred shares.
We have a "tactical model" that allows our clients to participate in some of his ideas ( I am learning from him).
We caution that there is greater risk here and that this needs to fit with a clients goals and objectives, time horizon and tolerance for risk as determined by their wealth forecast.
This week, one of our holdings that had been looking a little distressed, jumped by almost 100% overnight when it was announced that Lowes would be taking over Rona.
Our tactical model owned Rona shares.
When you think of it, Canadian assets have become very attractive to US companies with the weakness of the C$. So there may be more opportunities out there.
Back to the main point of the answer: there will always be opportunities in financial markets. The experts (like my colleague Paul) can help add value, however it is also important to keep a long-term perspective and allow for the cycle to assert itself: supply and demand will eventually find equilibrium and the patient will prosper.
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