"It's Been A Great Year For Markets"?

I actually read that. The "cheerleaders" want you to believe that it has been a great year for stock markets because in calendar 2019 the S&P 500 is up about 18%. Conveniently, however, they forget to include that the calendar year is far from over and that from the October 3 highs in 2018 to the December 24 lows in the same year (less than  three months) it fell by 20%. In the actual year from September 25, 2018 to today the S&P 500 is only up by about 1.5%. So best be aware when advisors are talking up the stock market.

In fact, given the recent turn of events: blackface, impeachment in the U.S., Brexit and the parliamentary craziness in the U.K., global economic slowing, Iran, China, Climate and so on and so forth the likelihood of increased volatility has got potential.

As we (at High Rock) manage our and our client's money through a measure of risk (we manage risk first) which incorporates a move of one standard deviation (from the mean), we know that the S&P 500  has a multi-year, one standard deviation of about 12%. A 20% move (as that which occurred in 2018), is obviously greater than one standard deviation (a 1.7 standard deviation).

If you want to be exposed to that kind of risk in your portfolio, by all means, take it on. But you should be well aware of the risk that you are exposed to and expect market swings in line with that level of risk.

All of our clients can know the risk levels (by standard deviation) in their portfolios, do you and your advisor know yours?

Ask the tough questions!

And do not be misled by the manipulation of the data that might paint a picture of a rosier world than is the one that actually exists.

Want To Compare Your Net Worth With The Canadian Averages?

Environics Analytics, the Toronto-based marketing and analytical services company, produced their WealthScapes report that "explores the financial well-being of Canadian households". This particular report shows the data for calendar year 2018, so it is a little dated, but if you want to make some general comparisons to how you are progressing, relative to the rest of the country, it makes for an interesting snapshot, especially the year to year % change, from 2017. 

Notably, household incomes rose 3.4%, while total net worth declined by 1.1%. Investments fell 7.3%. 

It absolutely amazes me that "Savings" in demand (chequing / savings accounts) and term deposits (GIC's) = $100,212, which is 12% of total assets. Not only that, demand deposit rates at banks are basically 0%, so you get almost no return on your money in those vehicles, but household debt is $146,693, where you are likely paying 3% or more to the same institution that holds your savings. Go figure? Pay down your debt with what is in your chequing / savings account, save 3%. Why give the banks and deposit taking / lending institutions free money? Crazy folks us "average" Canadians (whoever we are).

Or invest it (with discipline) and avoid the costly mutual fund industry who will try to take close to 2% of it.

There are plenty of ways to save a per cent here and a per cent there, so you best get a plan and investing strategy together to help you maximize your efficiencies. That is what we do at High Rock. We are not conflicted. Can you imagine that the bank wants their advisors telling you to use the free money that you give them in chequing and savings accounts to pay down their mortgages where they can make 3-5 % from you? No way! That is where they make their big money.

A per cent here and a per cent there adds up over time and can have a very large impact on your net worth in a twenty to forty year period.

A plan (or Wealth Forecast, as we call it at High Rock) will assist you in getting ahead of the "average" by ensuring that your money is working at maximum efficiency at all times. That is the key to financial success above and beyond the "average" Canadians.

"Picking Up Nickels In Front Of A Steamroller"

I love this line! A credit to our friend, the well-known economist David Rosenberg in his daily market letter Breakfast With Dave yesterday in his discussion of the current state of equity market bullishness. So I "googled" it. First search comes up with a Seeking Alpha note suggesting that this was "coined" as an investing metaphor for those traders / investors who take high levels of risk in order to generate small returns. We also call it "chasing returns", but the image that "picking up nickels" conjures is somewhat more emphatic.

This is what happens when portfolio growth, dependent on  equity market returns, stalls out (as it does at the end of an investing / economic cycle) and anxious investors who have become overly complacent about portfolio growth start to realize that slowing economic growth, stalled earnings and lower inflation will likely reduce future returns. (see my blog from last week: "What Are We Going To Do for Growth").

It would appear that there are some following our lead when I see headlines on BNN Bloomberg suggesting that stock market bulls (cheerleaders) are starting to play defense. I am humbled. Growth may have to take a backseat to income generation, at least for a while.

U.S. stock markets got very close to their all time highs last week on hope for some resolution in U.S. China trade negotiations and tomorrow the U.S. Federal Reserve will announce their much awaited interest rate decision: expected to be a cut of 1/4%, but there is hope for 1/2% cut and worry over a more tentative signal of their "wait and see" approach. Clearly, if markets are close to their all-time highs, the good news is "baked" in to current pricing.

The political situation in the Middle East has ramped-up the levels of uncertainty for financial markets, so the prospect of volatility in post-Fed decision trading is going to be escalated.

Basically, for long-term investors, this is just a lot of noise. However, considering the last time the Fed erred on the side of restraint (last December), the S&P 500 swooned some 15% or thereabouts. That can make even the bravest of investors gasp. Especially when it happens in the span of a couple of weeks.

Deutsche Bank is another to suggest a decline in stocks is coming (of about 13%), suggesting that the U.S. stock market has run way ahead of growth. Whether it manifests itself or not in the short-term, the point is, if you are one of those personalities who can't help but look at your portfolio values daily (or even weekly, monthly) it is important to prepare yourself emotionally for the potential of big swings in total value. 

The more risk that you have (i.e. the more fully invested in stocks that you are), the bigger the potential swings in portfolio value you will be subjected to. The only real defense (if big swings make you emotionally vulnerable) is an underweight (relative to target) equity position and overweight cash equivalent position. You are not going to miss out much on income generation if you can get 2% on your cash equivalent safety position (relative to the dividend yield of about the same). A 15% swing in  a stock price makes the dividend yield almost irrelevant should you experience that kind of move in equity markets, whereby a cash equivalent position value will not budge. It just means that recovery time (and it will recover) will be quicker, especially if you have some good, experienced portfolio management on your side. I know that this is becoming a bit of a repetitive message in my blogs, but we manage risk first at High Rock and we believe that our discipline will add additional value over longer periods of time. We certainly will not go "picking up nickels in front of a steamroller"!! 

That is part of our fiduciary duty to our clients.

What Are We Going To do For Growth?

If you are looking to your stock portfolio to help bring you that "promised" 7% rate of growth (which is more or less the average for a 60/40 balanced portfolio over the last 10 years), I would suggest that based on the outlook for economic growth and company earnings over the next few quarters, you will need to manage your expectations. Past performance, we should all remember, is not a guarantee of future growth. At least in the near term.

If you are a passive investor, you can sit tight. But why are you paying an advisor a 1% fee to do that when you can likely build your own portfolio of simple index ETF's and do it yourself (at a discount brokerage) and save the fee?

If you are getting the added advantage of financial planning built in, then perhaps you can justify some of the fee, but you are not getting portfolio management with simple passive investing.

If, as I suspect, the slowing global economic situation (which is likely not going to find an immediate fix with a China - U.S. trade deal or central bank monetary easing) will continue to send waves of volatility through global stock markets, passive portfolios are going to take some punishment: the 40% fixed income (especially if a good chunk is rate-reset preferred shares) is not going to be a good offset for lower stock prices. We witnessed that in the last part of 2018.

As portfolio managers with a disciplined process, we need to be defensive. We look at the probabilities ( approx. 50% of a recession, 70-80% of significant economic slowing) and position our portfolios accordingly:

Underweight volatile risk assets (equities) overweight the safer, no volatility cash and equivalent assets (that actually pay close to what stock market dividends pay, so we do not miss much there) and plenty of income generating assets that give us an annual cash yield better than 3%. So we can be paid while we wait out the storm.

Let's face the truth: the last 10 years have been, by and large, an upward trajectory for stock markets. Sure, some stock market "cheerleaders" want you to believe that this will continue (probability says that scenario is less likely, however, especially in the short-term). Of course, we all want to see stock markets go up forever, especially if 60% of our portfolios are invested in equities (advisors especially, who reap the benefits of the growing values of their client's portfolios). The reality however, is that nothing goes up forever.

So, either brace yourselves for a difficult period or bring in a professional to manage it for you and perhaps take advantage of the opportunities that this will ultimately bring (when we at High Rock will utilize some of the overweight cash to get back to our target weight in equity holdings). That part you should not try to do yourself (timing). It could end in disaster.

If you are paying a fee to an advisor, think about what value they are adding with that fee. There are alternatives to traditional investing with banks and old-school style financial institutions.

 You may be surprised at what you find.

Investors Beware: Regulator Wants To Protect Bad Advisors From Public Scrutiny

Click Here For Detail

Here's The Globe and Mail article by Wealth Management reporter Clare O'Hara: "Investor advocates are taking aim at proposed regulatory changes from IIROC". 

In a nutshell: "The proposal - which recently closed its second comment period - includes a minor contravention program (MCP) where individual advisers could admit to wrongdoing and pay a standard $5,000 fine; and an early - resolution offer for investment firms that will give regulators more "flexibility" in addressing rule breaches, depending upon their seriousness."

"However, investor advocates are raising concerns about the proposal saying the minor contravention program would be closing the door on publicly identifying offenders".

"In other words, an investor would not be able to search on a publicly available database for a record of an adviser having a history of contraventions of IIROC rules that are resolved under the minor contravention program."

If you go to the IIROC home page on their website, the first thing that should jump out at you is their commitment to protect investors:

What should trouble us is that the self-regulated  investment industry is trying to hide bad advisors from the public. 

If you are doing your due diligence and researching your prospective or acting advisor (as all investors should be doing), you are going to find that this bit of character reference is not available. Would you not want to know if your advisor had mis-behaved in the past? Would it not be part of the assessment process? At least to ask him / her to explain themselves for their past indiscretions.

More conflict of interest from the self-regulating investment industry.

Once again I bring up my past experience as a branch manager: advisors who try to flaunt the rules to their advantage usually do not just do it one time. I have witnessed plenty of serial bad behaviour in my time and those who behave badly should be identified to those potential investors who may be fooled or sold on placing their trust in them.

I am not the only one who thinks this is somewhat absurd:

According to Ms. O'Hara: "" question how such an outcome is in the public interest and consistent with IIROC's stated goals of protecting investors and supporting healthy Canadian capital markets" said Ermanno Pascutto, executive director of the Canadian Foundation of Advanecment of Investor Rights (FAIR), in his comment letter to IIROC".

"The Ontario Securities Commission's Investment Advisory Panel also expressed concern about granting anonimity to advisers who committed minor violations. "How can IIROC assert this proposal is in the public interest when the public is kept unaware of each MCP sanction?""

There are alternatives to the bank dominated wealth management and investing industry: wealth and portfolio management that carries a legal fiduciary duty to their clients well above the proposed "standard of care" administered by the IIROC advice channels. 

And your account protection is the same as the banks give you:

For example, High Rock uses Raymond James Correspondent Services (RJCS) to handle our client accounts (custody) and back office needs. Raymond James is protected by the Canadian Investor Protection Fund (CIPF): up to $1 million for each account.

My friends, if you cannot trust the regulators for full-disclosure, it may be time to seek out the alternatives.