A Tough Start to 2015

Investors in financial assets do not like uncertainty.

• When uncertainty exists, traders are the first to the exits. When volatility increases, those who might profit from volatility (short-sellers) get involved, which can lead to higher levels of volatility.

As a long-term investor, it is important not to get caught in the emotional roller coaster that can occur as these market gyrations cause your portfolio to swing.

• If you have the right balance and proper diversification, these swings should be mitigated (relatively speaking) 
• in a balanced 60% equity portfolio a 2% swing in equity markets will likely impact your portfolio by .50% to .75%, depending on how fixed income  (the other 40%) markets are reacting.
• Often, as money moves away from riskier assets, it will look for safety in fixed income assets, driving those prices higher and lessening the impact of volatility on your balanced portfolio.

I like to watch this index:

http://money.cnn.com/data/fear-and-greed/

If you have cash to add to your portfolio mix, this can certainly be helpful: buy when fear is extreme: when everybody else is selling. It is always good to have a cash balance to utilize in these times.

However, there are many other technical indicators that we need to monitor in tandem to ensure that we are not trying to catch the proverbial "falling knife".

That is where expert portfolio managers can be enormously beneficial because the best ones can see the signals on a broader scope.

So what is causing volatility?

• Uncertainty around oil prices
• European economic uncertainty and the impact on a global scale
• Russia
• China
• Can a stronger US economy provide enough of a counter balance to offset the above?
• when will US interest rates start to rise?

That is a long list.

So the theme for 2015 remains: Expect the unexpected!

• December 26, 2014, 1:31 PM ET

How to Save Like the Rich and the Upper Middle Class (Hint: It’s Not With Your House)

ByJosh Zumbrun (The Wall Street Journal)

The very rich often live in expensive houses, but that’s not where most of their wealth is.

In fact, for the wealthiest 1% of Americans, only about 9% of their total net worth is tied up in their home. That’s compared to 63% for the broad middle class.

That’s among the revealing findings of research, released earlier this month, from Edward Wolff, an economist at New York University who studies the wealth distribution. His work analyzed the Federal Reserve’s Survey of Consumer Finances to peek into the widely differing portfolios of the wealthiest 1%, the next 19%, which can be loosely thought of as the upper-middle class (though the top of this range is getting very wealthy as well), and the middle 60%, or the broad middle class.

The top 1% of Americans–who have a net worth of more than $7.8 million–hold nearly half their gross assets in unincorporated business equity and other real estate. They have an additional 27% of wealth in financial securities, such as corporate stock, mutual funds and personal trusts.

But typically, little of their wealth is tied up in their personal residences.

For the middle class, the picture could hardly be more different. Nearly two-thirds of their wealth is in their residences. It’s easy to see why: Imagine a young family with a $200,000 home, a $150,000 mortgage, and $50,000 in cash and retirement accounts. That’s not a family that’s putting their bottom dollar into their home. But that family would have 80% of their gross assets in their principal residence.

The upper-middle class has a very different financial profile as well. The “next 19%”–those with more than $400,000 in assets, but less than $7.8 million–have less tied up in business equity and financial securities than the rich, and less tied up in housing than the middle class. But comparatively, they have more of their wealth–hundreds of thousands to millions of dollars–in their pension accounts (which includes accounts like IRAs, Keogh plans, 401(k)s, defined contribution pension plans).

Mr. Wolff’s data also shows the total share of assets held by different wealth classes. Here he uses the breakdown of the top 1%, the next 9% and the remaining 90%. The only assets that are majority owned by the middle class are primary residences. Pension accounts and life insurance also remain major middle-class assets.

The research helps explain part of why the recent recession, which hinged on a housing bust, was so much more difficult for the middle class than a typical recession. It also helps explains why the recovery has been so disappointing to many. Housing has regained its ground only slowly while corporate profitability has boomed. In other words, we’ve seen slow growth in the major middle class asset, but substantial growth in the assets held by the wealthiest.

Scott's comment:

I think there is a powerful argument for diversification here. Why are the wealthy getting wealthier? because they are more broadly diversified and less susceptible to the decline in the value of one particular asset class. With the Bank of Canada suggesting that a 30% correction in the housing market is possible, there is a great deal of re-thinking of the family balance sheet that may be needed. If your home value is greater than 50% of your total net worth, you may be handcuffing your potential for future growth.

Worth thinking about.....

Wealth Management 101

What is Wealth Management ?

Basically it is about setting goals: what do you want to achieve for yourself and your family in your lifetime and beyond.

• for many, one of these goals is Financial Independence
• the more independent you are, the more options you will have

Meet Tim and Jenny

• early thirties
• both professionals
• excellent savers
• savvy spenders
• renters
• now, with the power of compounding and a professionally managed, balanced and diverse portfolio they have accumulated $1,000,000
• they are "retiring" from their jobs in 2015 and choosing new, more rewarding career paths.

That is Financial Independence.

How many would love to be in their shoes?

• They set their goals early on, honed them and fine tuned them along the way, made a plan and stuck to it.
• It is easy to get distracted along they way:
• the lure of home ownership
• the shiny object of the "latest" fad in financial advice (plenty of that in the media these days)
• the constant re-assessment: are we doing the right thing?
• difficult financial markets and second guessing yourself
• All of these can trip you up, which makes getting good advice along the way even more important
•  Good Advice : what is that?
• It is a professional who has your back in seeing you to your goals.
• Who helps draft a plan: target growth and risk mitigation
• Who monitors it and makes the appropriate adjustments on an ongoing basis
• Who helps distinguish the reality from the "noise"
• Who is not conflicted by selling you things, ie is fee based.
• Who's fiduciary responsibility (putting you first, ahead of his/her personal objectives) is the absolute priority.

Set your goals, make a plan and get good advice.

That is Wealth Management.

Stay tuned, more to come.....

What to expect in 2015

Expect the unexpected:

Most analysts, economists and portfolio managers will make projections for 2015, but a great deal of them will be wrong. It is why most portfolio managers are unable to even match their benchmark indices ( the going rate by which portfolio managers beat their benchmarks is somewhere around 20%) 

• To start 2014, the "smartest in the room" were calling for the 10 year US bond yield to get to 3.5 or 4.0%.
• Where did they end up?
• 2.2%
• Bond holders were big winners, not big losers as was widely expected.
• for 2014, a Canadian government bond ETF had an approximate total return of 8.5%
• In my 60/40 model the 40% Fixed Income component had a total return of a little over 8.5% (including my preferred share mix that had approximately 10% total (pre-tax) return.
• The Canadian equity allocation returned approx. 5.8%
• US equity allocation returned approx. 11.2%
• International equity allocation returned 3.2%
• The total model returned approx. 7.75% (right on the long-term target average return of 7-8% and nicely ahead of the benchmark 60% World Equity index and 40% Canadian bond index of approx 4.5%) 

I always preach (to those who will listen), balance and diversification, over time, will give you the best possible return while minimizing the risk needed to get that return.

We do not know what 2015 will bring, but expect volatility in financial markets. to counter that volatility, balance and diversity will be your friend.

Happy 2015.

A new chapter begins.

Stay tuned for a more active and regularly updated blog to get a sense of what I am thinking about the state of the world economic environment and its impact on financial markets and balanced portfolios.

More importantly: what I am doing with my money!!

Scott.

Asset Allocation and the building/re-balancing of Turner Tomenson client portfolios.
A significant number of academic studies have focused on Asset Allocation and the performance of
portfolios over time. We have adopted, and continue to utilize, Modern Portfolio Theory to find
strategic advantages to building client portfolios through Asset Allocation for predictable risk adjusted
returns over time.

Why?

Through the economic cycle, from trough (recession) to peak (expansive GDP growth) and back to
trough (recession), different asset classes will perform at different levels.
In times of slowing economic growth, central banks will lower interest rates and provide monetary
stimulus to soften the negative impact. Usually through this period more growth-oriented assets will
underperform (such as small companies or developing economies), while interest rate-sensitive assets
(fixed income, like bonds or preferred shares) will outperform.

As investors perceive an economy is close to bottoming (with interest rates at their lows), they start
looking to growth assets for increased returns, anticipating the next period of growth in the cycle.
Unfortunately timing this change is fraught with danger and volatility tends to rise during this period of
change.

As can be seen in this chart of the S&P500, from the end of the recession in 2009, the market has had a
number of significant surges and corrections, although the direction has continued to be up (with higher
highs and higher lows). Achieving portfolio growth and not giving it back during times when markets are
difficult is always the greatest challenge. Through consistency in our Asset Allocation strategy (staying the course with our target weightings) despite some holdings that may under-perform at times, we are able to capture growth when it occurs.

If we look at the 3 year history of our 60% equity/40% fixed income model through the very slow economic recovery since 2009, it is quite clear that all asset classes have performed at certain times, making
a contribution to the total portfolio

 However, there have been assets that have, during the low interest rate environment, been
considerably better performers (such as preferred shares). However, this does not mean that they will always out-perform. In fact, as interest rates begin to rise, these assets will likely be under-performers (as will government bonds and some high-grade corporate bonds). Some might question why hold these at all? There’s too much uncertainty and potential volatility in the world, and these provide stability and income should the unexpected occur. The same holds true for assets that at times provide a high degree of growth to the portfolio, but lag during other periods. Specifically the small companies indexes (Canada: XCS, US: IWR, IWC, Intl: SCZ) or emerging markets indexes (XEM, FXI, EWZ and INDY) have been in this category lately.

So, a common question has arisen through the under-performance of some of our high growth assets:
Why is my TFSA not performing? Garth and I have adopted a strategy for tax efficiency that prescribes
using different accounts within the total portfolio for sheltering assets from tax. For highly taxable, interest paying investments, we prefer, when we can, to shelter them in the RRSPs. This would help RRSPs perform better, through difficult markets, but under-perform in times of growing equity markets.
For TFSAs we have more aggressive growth investments sheltered from the potential for large capital
gains. However, through difficult markets, these assets have underperformed. As history has proven,
this is likely a short-term phenomenon and in time, these assets will once again outperform, and TFSAs
along with them.

We try to hold the most tax-advantaged assets (which pay tax-efficient dividends) in non-registered
accounts.

Key take-away:

Different assets in the total portfolio will perform (and under-perform) throughout the economic cycle.
The balance and diversification of your total portfolio is crucial to capturing the growth in good markets
and limiting the downside in difficult markets (regardless of the account in which they are held).

Predictions for 2013:

Underperforming assets (small companies and emerging markets) will likely out-pace assets that have
performed well over the last few years (REITs, Preferred Shares). However, a balanced portfolio should
still have those asset classes, because it is never certain what our volatile world will throw at us next.
We are always aware our main obligation to you is to preserve your capital. We pursue growth within
this mandate. We are pleased to report the model portfolio described above has achieved a return of
10.71% in 2012, with the three-year average return being 8.28%. More importantly, $100,000 fully
invested in our model on Jan. 1, 2010 has grown to $126,225.93, a 3 year compound annual return of
8.74%.

Thank you for the privilege of working with you, and we look forward to many years of success

www.turnertomenson.ca

It’s been a good year

It’s been a good year.

Despite rising interest rates, market volatility, European debt woes, slow economic growth, the US housing disaster and all the pundits and doom-sayers, 2010 has been a profitable year for Turner Tomenson clients. Our 60-40 model, upon which we base most of our client portfolios (that’s 60% equity-40% fixed income) is at point of writing up by approximately 14% since the beginning of 2010.

Best performer (and who would have guessed?) has been the S&P/TSX SmallCap Index Fund (XCS). Reference: (http://ca.ishares.com/product_info/fund_overview.do?ticker=XCS)

Of this, 56% is held in the Materials and Energy sectors. While it makes up only 3% of our model, it is important that we have exposure to this particular asset class. Because we cannot necessarily pick which asset class will out-perform in any given time period, we want to have exposure to asset classes that have the potential to move higher and add to our model’s ability to achieve growth. This is part of what makes this diverse model so attractive. As you know, our goals are (a) preservation of capital and (b) making it grow.

With the potential for growth in this Small Cap Fund, however, is a greater risk (and potential for volatility) so we want to ensure we keep its weighting light, relative to the rest of the portfolio.

Our (boring) theme continues to be balance and diversity.

Some of the other asset classes that have performed well this year:

The iShares Russell Microcap® Index Fund
The iShares Russell 2000 Index Fund
The iShares Russell Midcap Index Fund
The iShares S&P/TSX Capped REIT Index Fund
The iShares S&P India Nifty 50 Index
SPDR® Gold Trust

Will these out-perform in 2011? Likely not, in fact we’re currently not buying them (and in some cases re-balancing client positions to take profits) because they have become too expensive for our liking. This is exactly what we mean by active management.

It’s also why we preach the discipline of balance and diversity: in all likelihood, one of this year’s underperformers will be next year’s outperformer:

Horizons AlphaPro Gartman ETF (“HAG”)
The iShares MSCI EAFE Index Fund (CAD-Hedged)
The iShares FTSE China 25 Index Fund

As well, we have the Fixed Income stabilizers in the portfolio that focus on interest income and dividends and perform as our model’s anchors when markets become volatile. And we certainly expect more of that in 2011.

Late this year, Equity markets have become stronger as the US Fed has chosen to inflate assets with quantitative easing, but there are perils and uncertainties that can turn the euphoria into fright with one nasty economic or political shock and investors must always guard against complacency.

A large increase in volatility can and may be just around the corner.

Having balance and diversity in a portfolio is the key to limiting the impact of this potential volatility.

We wish you a happy, healthy, prosperous and Balanced New Year.

www.turnertomenson.ca