Hope For The Best, Prepare For The Worst

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Economists estimates missed significantly on US Q2 GDP growth, reported this morning at 1.2% (was expected to be closer to 2.5%).

For the past several years, the US federal Reserve has been suggesting that there would be a marked improvement in this data, as "transitory effects" dissipate, but that has yet to materialize. They remain hopeful, but are reluctant to act.

Financial markets were also disappointed by the Bank Of Japan's lack of significant stimulus announced at their monetary policy meeting today.

We continue to expect economic disappointment as high levels of global uncertainty continue to plague business and consumer economic decision making.

Our investing strategy at High Rock continues to incorporate this by being prudent and holding larger than normal cash balances in our client portfolios.

Interestingly our clients are getting better than the bench-mark returns, while at the same time reducing their exposure to risk and the potential for greater volatility.

And they get a good night's sleep not having to worry about it.

Our calculations (with data provided by Bloomberg Total Return Analysis, on a daily basis) show that our benchmark equity index (ACWI) has grown by about 5.3% since the beginning of the year. Our benchmark fixed income index (XBB) has grown at a rate of about 4.25%. A combination of 60% ACWI / 40% XBB has shown a return of  close to 4.9%.

Allowing for 7 months of fees (we use all-in costs of 1.2% annually), this calculates to a 4.2% return (net of fees), this year so far.

(These returns are not a recommendation to make purchases or sales of any securities, but are intended for comparative purposes only, Historical returns are in no way a guarantee of future returns)

By comparison, a client who joined us in January and has not yet been fully invested (which has been a gradual process, based on the opportunities presented by market swings and volatility) has achieved a return of 5.7% (after fees and costs) since we began the building process. 

Building a portfolio takes time and patience and may take months or even years to accomplish, depending upon the prices of the assets and their respective value. 

Importantly, you need cash in the portfolio to take advantage of volatility. As a result, cash not only turns out to be a defensive asset, but also an opportunity asset.

But if we can beat the benchmark with an over-weight amount of cash on hand, we are also reducing the risk that clients are exposed to.

Maximizing returns and taking less risk is a pretty good recipe for a better nights sleep, and at their 6 month review we definitely got this particular client's thumbs up on their relative "comfort index".

Feedback, questions and comments...
scott@highrockcapital.ca

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