Canadians Feel Financial Services Have Become Less Affordable

According to the Legatum Prosperity Index 2017. 

Canada fell to 8th in the world from 5th (out of 149) in the overall rankings.

Meanwhile Canada's banks are announcing record profitability, led by significant increases in earnings from wealth management.

 Connecting the proverbial dots: Canadians appear to be paying more for financial services but appear to be less aware of how to find other options beyond banks.

In fact, reading further into the report: "Canadians now feel that the government is doing less to counter monopolies; as a result, for the first time in ten years, the US has regained its advantage in Economic Quality over Canada".

And: "The nation's entrepreneurial environment suffered too, as people feel less convinced that working hard will get them ahead".

I read personal income taxes into the latter statement, the impact on professional corporations (doctors, dentists, etc.) from new tax measures will not make this any better. 

In fact: "Canada has also struggled considerably in the last decade in Health and fell considerably in this pillar in 2017".

If we don't allow our health care professionals better financial lives, we will be less able to keep the best and brightest in this field and we all suffer, especially as the population ages and more medical professionals are needed.

But, I digress.

What needs to happen is that Canadians need to be made aware that there are great quality (well-regulated) options for wealth management services outside of the traditional bank / investment dealer offerings.

You can have your bank accounts with your favourite deposit taking institution, but it does not mean that you have to save and invest through them at "increasingly unaffordable" costs. With modern technology (electronic fund transfers), moving money between financial institutions (big and small) has become safe, fast and easy.

There are alternatives for saving and investing and what we do at High Rock is one of them. We can offer a superior wealth management experience (wealth forecasting, risk management, fiduciary duty and personal service) at a very reasonable cost (likely not much more than a robo-advisor after all costs are considered).

We just need to get that message out there, but we can't compete with the advertising budget of the big banks.

So my friends, we need your to help spread the word: forward this blog on to someone that you think might be interested!

Too Much Money Chasing Too Few Assets

There is no shortage of commentary on the Bitcoin "craze" (chart above), you can read about it anywhere, in some cases there are plenty of people way smarter than me weighing in. It will end when it ends and there will be plenty of tears and lost fortunes.

This is what happens when there is too much liquidity in the financial system which is the fallout of the aggressive central bank extra-ordinary easy monetary policy post financial crisis.

The problem is that this money is not necessarily finding its way into long-term economic development (which would elevate productivity) and a good chunk of it is entering the "casino economy" with classic "get rich quick" human behaviour.

And we know how that usually ends:

A classic case in point (and a scary sign of the times): I talk to lots of pretty regular folks on a daily basis. Some are clients, but many are non-clients looking for some help. The sign of the times is that many of these calls are from investors who have been afraid of investing since they suffered through  and the frightening and gut-wrenching 2008-2009 stock market collapse.

Just now are they regaining the confidence to be comfortable stepping back in. Oh dear, I think, not exactly the best of times for that. Volatility has been low and they have been successfully (with small amounts of money) buying ETF's on the dips in stock markets. This has been building their confidence and they are looking to commit larger amounts.

The big problem, of course, is that when asset bubbles burst (and they will) all risk assets become more closely correlated. That means that selling of risk assets intensifies across the board: as assets get sold to pay for the losses on other assets.

Some are receptive to my cautious approach, others tell me stories of their search for an "advisor" where the sales pitch has been based on the notion of a continued multi-year bull market and that there is no time like the present to jump in.

I would not want that kind of risk in my portfolio when the metrics that we use to measure value are screaming "expensive" at me.

As per usual, I suggest that if they want good risk management and long-term stewardship for their wealth, then we are the folks to turn to (see our most recent 11 minute weekly video on how we assess risk). If they want to gamble, we are not.

Past performance is no guarantee of future results, but at High Rock, we work very hard to try to get the best possible risk-adjusted returns for our clients.

Trying To Reason With The Holiday Season

In North America, the consumer is 65-70% of the economy. So we all watch to see what the consumer mood is at this time of year to get a sense of what retail selling will bring to the economic landscape. In the US, the consumer will spend about 1/4 of their annual retail purchases over the course of the next month.

The traditional "Black Friday" data has been watered down in recent years with the advance of "on-line" shopping, so the early signals of consumer spending are not as easy to read. Needless to say, there are lots of analysts watching closely.

From the Wall Street Journal : "analysts see robust holiday sales, underpinned by rising wages, low unemployment and strong consumer confidence". Black Friday sales were expected to grow by close to 5% over last year, but that is only the third busiest shopping day. Now "Cyber Monday"  and the Saturday before Christmas are the top two shopping days.

Lots of optimism has been built into the current scenario and Amazon stock has hit new highs:

If shoppers are spending more, where is it coming from?

Wage growth in the US has stalled (and has not returned to pre-financial crisis levels):

And as we suggested on last weeks weekly video, US consumer debt levels are pushing to record highs:

We haven't seen the Q3 Canadian Household Debt to income data yet (due in mid-December), but the Q2 numbers showed debt levels rising while income levels were falling.

What this tells us is that spending may be helping economic growth in the near-term, but it may also be veiling a growing potential problem with consumer debt levels.

If the US Federal Reserve raises rates in December (mid holiday season) as they are expected to do, debt servicing costs are going to start to rise and cut into consumer spending power. The greater the debt burden, without wage growth, the less the consumer will have at their disposal for discretionary spending.

If 2/3 of the economic power becomes burdened in this manner, the medium term economic prospects are going to start to look a little more grim.

Our job is not to get caught up in the moment (the hype), but to try to see what is out there on the horizon.

Enjoy the holiday season, the New Year may bring some surprises.

You Don't Have To Be Worried About Money

But about half of Canadians are: read Rob Carrick in the Globe and Mail "One in two Canadians is a bundle of nerves about money".

At High Rock, we do Wealth Forecasts (prepared by our Certified Financial Planning , CFP, professional) for all of our clients: from ages 25 to 85 (because we also have multi-generational families that we are working with) before we even begin to discuss investing strategy and there is no obligation to work with us if we are not the right fit.

We leave that for you to decide.

However, we also know that a Wealth Forecast is not worth the paper it is printed on if it is not regularly monitored, updated and the accompanying investing strategy adjusted to ensure that whatever goals you have are within your reach.

So that is what we do.

We can set up automatic withdrawals into your investment account from your bank account so that you can become comfortable with the payments and it just becomes part of your regular monthly cash outlay.

We can't force you to save. You have to take that initiative, but we can help you get it started, by creating a plan and helping you steward that plan forward.

It costs you less than many mutual funds do, so it is cheaper than what most banks can offer.

And it is personal (not robo) service.

Help yourself if you are in the 47% of "money-stressed" Canadians. Our clients sleep at night. It is amazing what seeing your net-worth projection can do for you and how much it can motivate you into believing that your financial goals are achievable.

10 Years Of Globally Diversified Balance

On this week's High Rock Weekly Video, Paul and I briefly discussed the long-term returns that we use to justify our expectations for long-term client portfolio growth assumptions.

We think that a portfolio of a blend of our 3 models should be able to achieve somewhere in the vicinity of 5-6% average annual growth over a multi-year period (before fees and taxes).

I thought I might go into this in a little more detail:

As we are reasonably close to the end of the 2007-2017 investment cycle (peak to peak), if we look at a global equity index (I normally like to use the MSCI All Country World Index, but there wasn't quite enough Bloomberg history, so I am using the MSCI World Index , fewer constituent companies, but generally the same idea) over the last cycle:

The 10 year average annual return has been approximately 7.45% in C$ terms (some years better than that average, some years significantly worse). That would represent a globally diversified equity portion of a portfolio.

In a 60% equity portfolio, this is a weighted annual average return of 4.47%.

As for the fixed income component, we can use the Canadian Bond Index ETF XBB:

The 10 year average annual return here has been 4.49%. This represents the fixed income portion. 

In a 40% fixed income portfolio this is a weighted annual average return of 1.80%.

Combining both of these gives us a total annual average return over the cycle of 5.87%.

Of course, historical returns are no guarantee of future returns, but can we let this be our guide for our expectations for future returns?

In the future, as we tell our clients, we will likely have some years that fall below the average annual return and others that might exceed the average.

As we take a longer-term perspective, we consider the most important part of our work to be not just getting decent (relative to historical averages) returns, but to get these returns in light of taking reasonable risk.

At the moment the risk free rate of return (a 90 day Government of Canada T-bill, no risk in owning this investment) is a little under 1%. That will not get you much after taxes (interest income is fully taxed at your marginal rate) and inflation (in the vicinity of 1.6%, but depending on where you live and what and how you consume).

So to stay ahead of inflation and taxes, you do need to take some amount of risk with your investments. The type of risk that you take can certainly influence the outcome. That is why we focus on the return per unit of risk. 

Even in a balanced and diversified portfolio, you can get risk that can unhinge a longer-term portfolio performance. Especially when the traditional correlations between equity and fixed income markets are no longer working to protect you.

The past 10 years (including the financial crisis) have hopefully provided you with something in the vicinity of the 5.87% with balanced and diversified investments alluded to above.

The next 10 years may not necessarily do the same because the risks change. Being on top of those changing risk parameters is extremely important. That is what we do to prudently protect our and our clients money: find good opportunities and understand the risks inherent in them.

Under The Heading: What On Earth Can they Be Thinking?!

More here: http://funds.rbcgam.com/pdf/fund-pages/monthly/rbf272_e.pdf

As will happen from time to time, I get to meet some bright young people (often referred to me by one of our clients) and engage them in conversation about their current investment situation (as was the case earlier this week). As is often their situation, they are hard working (at their chosen profession) and have little time (or have had little time up until now) to explore and learn more about their savings and the possibilities for building and managing their wealth. Usually, they have trusted an institution (usually a bank) to assist them with the growth of their savings.

Most are relatively conservative about the type of risk that they should be taking (which is why they have ended up talking with me) but also realize that to stay ahead of inflation in the longer term, they are going to have to do better than low yielding GIC's.

They often have a somewhat difficult time getting hold of their bank advice giver to find out exactly what their returns have been and what fees they have been paying.

CRM2 (the legislation that requires both $ fee outlays and annual portfolio performance) is supposed to make this easier, but apparently the conversation with their advice giver does not offer up a whole lot of clarity.

I, in no way want to bash the institution above (who I bank with and actually get pretty good personal banking service from) however, if you look closely you will see that this particular mutual fund (which I am using only as one example amidst thousands of others), which their asset management division manages, has 5.6 BILLION dollars under management. 

The cost of the managing of this balanced fund (to the investor who has their money invested in it) otherwise known as the MER is 2.16% (see above) annually. 

If you invested $10,000, 10 years ago (pretty much the full investing cycle, through the 2008 crisis) in this fund you would now have $13,686 (according to the above chart) a little over 3% per year in growth. Likely, you paid over $2,200 over this same time frame just in management fees alone. You probably do not realize that you have paid them because they are listed in the fine print and rarely part of the conversation with the advice giver.

How does 5.6 Billion dollars find its way into paying such an exorbitant amount in management fees?

At High Rock, as an example, we can cut that management cost in half. We run balanced portfolios and charge our clients a management fee of 1%.

So why on earth would anybody pay 2% for a balanced mutual fund that only returns 3% ?

Why are 5.6 Billion dollars (in this one fund alone and there are thousands of these funds out there) doing so? It makes no logical sense.

I would suggest that it is because it is just not being made clear to the investors.

The intelligent people that I talk to, when they finally have the time to realize that their money has not been growing as well as it otherwise should have, can't seem to get straight answers from their bank advice giver.

The straight answer is: you have been paying too much and it is not in your institution's best interest to tell you. So they don't. They hem and haw and avoid directly answering the question.

At High Rock we don't avoid the question. Which is the way it should be: total transparency above and beyond the CRM2 requirement. You can also throw in great client service and fiduciary responsibility as well. We not only try to get the best risk-adjusted returns, but also save our clients money in fees and costs.

Ask the tough questions. If you don't get good answers. We have them for you.

Finding Investing Opportunities In A High Risk World.

According to President Trump, he is responsible for the stock market rally and the record highs that it has achieved (more here: https://www.bloomberg.com/news/articles/2017-11-06/trump-just-took-credit-for-the-stock-market-s-huge-rally-again).

Others might suggest that corporate earnings are responsible, although it may depend on how you look at those earnings and whether or not they are over-achieving or not.

We won't get drawn into a political debate (we remain politically agnostic) and we have our opinions on earnings and their expectations being more than built into current pricing. 

Current pricing is suggesting some 30% annual average earnings growth above the 10 year average over the course of the next year: 12 month forward looking Price to Earnings ratio is 18 times, the 10 year average is 14.1 times, which includes expected earnings growth of 10% over the net year). With economic growth of just above 2% (12 month moving average) as we discussed in last week's High Rock weekly video, we see this as a stretch. In other words, buying the S&P 500 ETF at this point in time would not be prudent as it is fraught with the risk that it may not meet investor's very high expectations. 

You may have to click on this (above chart) to enlarge it, but the message is clear, investors are being emotionally driven by the psychological biases that always appear in their behaviour.

That is a trap that we do not want to fall into.

That does not mean that we are not continually scouring markets for opportunities: When the C$ over-reached in late summer, we used that opportunity buy $US. When the Canadian equity market was the worst performing developed stock market, we decided to add to our holdings and when General Electric broke below $20 last week (down almost 40% from late 2016's highs), we put a little of our $US to work.

Everything we do is measured and relative to our return per unit of risk targets. 

When US equity markets get cheaper, we might add to our holdings of them. However, until that time, cash (or cash equivalent high interest savings funds) represent a tactically prudent alternative.

Meanwhile, both Canadian and US 2 year to 30 year yield spreads are narrowing, close to their lowest levels since 2007 / 2008:

Historically, when these curves flatten, a recession is not far behind. The US Federal Reserve is expected to raise interest rates in December and March, which would likely see this narrowing further (short rates higher).

Lots to concern us, so we need to be particularly careful (which is what our clients would expect us to do).

Truly Great People!

I am somewhat blessed in my life because of the nature of my job. I get to meet some really fantastic individuals from many different situations: artists, authors, athletes, media personalities, executives who run large corporations and executives who run their households, small business owners, economists, medical professionals, legal, accounting and educational professionals and those who offer up their passion to public service and charitable work. Some continue to ply their trades, some have moved into different chapters of their lives. 

The one common denominator is that they all have tremendous experience in their backgrounds and I love the vast amount of collective knowledge that they have attained through their lives.

My High Rock business partner Paul and I started our Private Client Division almost 3 years ago, with a very simple motivation: quite simply, we wanted to offer those interested in investing the way we invest our own and our families money (which we do rather well, I may say) and provide them with the same sort of stewardship that we apply to our own family wealth. We also wanted to do it as openly and transparently as possible, especially when it comes to fees.

Trust is a leap of faith, at times. It takes a long time to build and can be easily broken. We were fortunate to have a number of folks who trusted us right from the get go, that allowed our dream to evolve. For that we are truly grateful. The good news is that some 3 years down the road, they are still with us.

Recently, we decided that we could still grow our business further without compromising our ability to serve our clients and perhaps build more scale whereby we might be able to continue to reduce our costs and pass those on to our clients.

For these purposes, we asked a select few of our highly knowledgeable clients if they would be interested in advising us on matters of technology, marketing and other investment issues.

And so, we have added what we consider to be a brilliant "brain trust" of sorts to establish our advisory board to add their expertise in matters that we may not be so expert at. Our expertise is in wealth and portfolio management and we want that to continue to be our focus, so to have the additional support in growing our business is wonderful and greatly appreciated. 

If you wish to visit our website http://highrockcapital.ca/advisory-board.html you can click on the various individuals to see who they are and a bit about them.

We do have so many gifted and talented clients that we are always open to your input. If you wish to get in touch with any feedback, we are wide open to it, so please feel free to email me scott@higrockcapltal.ca

Another October In The Books (And No Crisis)!

In fact, for one of the historically most volatile months, this October has seen record lows in the Volatility Index (VIX), now sitting just below 10. If you remember 2008, volatility set record highs (above 60 on the monthly chart above).

As we briefly discussed on our High Rock weekly video (formerly known as our weekly webinar), yesterday: Central banks do not like volatility because it erodes confidence, both at the business and consumer levels, and when they are not confident, businesses and consumers postpone making economic decisions, which in turn negatively impacts the economy.

So central banks pumped vast amounts of liquidity into the global financial system (by purchasing bonds from the bond market) after the financial crisis in an effort to combat the surge in volatility that followed.

It has worked. Consumers are the most confident they have been in years (certainly in the US, chart below):

Investors are extremely confident as well! Stock markets in the US are pushing record highs (gold line in the chart below):

Bond markets (the white line) are being held by continuing low inflation.

So that is all history.

Our job as risk, portfolio and wealth managers is not to dwell on on what recent history has provided us, but to look forward to try and find the potential risks that lay in wait somewhere down the road.

Looking at the 30 year chart of volatility index (back at the top), there is a pretty clear pattern that evolves over time: a swing from higher levels of volatility to lower levels and back again.

Suffice it to say, there is a pretty strong likelihood of this pattern repeating. Volatility rises when uncertainty rises, but for the moment, central banks have reduced the impact of uncertainty (of which there is no shortage, at the moment).

Volatility spikes come when new and previously unidentified shocks (economic and / or geo-political) surprise financial markets.

Our job is to be on guard for impact of those shocks. 

Having balance between equity (stock investments) and bond investments has historically proven to mitigate at least part of a spike in volatility. In 2008-2009 a 60% equity portfolio and 40% fixed income portfolio probably dropped about 15%, or thereabouts, before beginning its recovery.

At current levels, low yields on bonds and record high stock prices, that correlation no longer can offer the same protection (more on this here: https://www.bloomberg.com/news/articles/2017-10-30/pimco-quants-say-beware-of-bond-hedges-for-high-flying-stocks).

That is why (at High Rock) we advocate a more tactical approach to investing, because our duty to our clients (and our families, because we invest in the same assets as our clients) is to try to protect them, as best we can, from the ravages of volatility, which are not only potentially financially devastating, but also psychologically devastating as well.

Being defensive means that you won't likely get the double digit growth that stock markets offer when they are making record highs (although High Rock clients may notice that October added nicely to their portfolio growth). However, it also limits the potential downside, which, over longer periods of time, allows a more even and predictable growth pattern.

That is the stewardship of wealth rather than the "rolling of the dice".