Trying To Make Some Sense Of It All

Next week I am apparently going to be a guest host on BNN Bloomberg's "The Street" and thought it might be worthwhile to put a few coherent thoughts together in order to not make a complete fool of myself. Some of their guests are quite brilliant.

 What better place to do that than on an uninterrupted (and slightly delayed) flight from Calgary to Vancouver, where I had been visiting with some clients and prospective clients and discussing with them the current state of the global economy, financial markets and the precarious world of trying to find the best way to manage wealth in spite of it all. Sorry Vancouver clients and prospective clients, but this may be a bit of a preview of what you might have to endure during our meetings over the next few days.

The U.S. economy is strong: unemployment is low (and may inch even lower) and the consumer appears to be bouncing back from a sluggish Q1 (according to today's retail sales data). Inflation is creeping higher and the U.S. Federal reserve is ready to keep raising short-term interest rates (see Paul's blog from yesterday).

The second quarter for the U.S. economy looks pretty good. However, the second quarter is coming to an end in a couple of weeks and it will all soon be ancient history. Our job is to look out somewhat further to try and get a handle on what is coming over the next couple of years and how this might all impact our and our client portfolios (and what we need to do to continue to get the best possible risk-adjusted returns to keep them moving forward to their long-term goals).

What we do know is that we are late into the economic cycle, (perhaps akin to being in the bottom of the 10th inning in baseball parlance) which has been aided along the way, first by aggressive monetary policy easing and subsequently extended, more recently, by a dose of fiscal policy easing. As with all things cyclical, despite how rosy everything may appear on the surface, we know that a recession is going to happen in due course. Exactly when is not clear. Had the "hope" of substantial fiscal easing not materialized with the surprise election of the current U.S. administration, we may already be well into it. We are not there yet, but it is inevitable.

It may come on the end of monetary stimulus and yield curve flattening, it may come on the rising global trade protectionism, or perhaps it will come on the escalation of some geo-political military mis-adventure. But make no mistake, recession will happen. The global debt situation (record levels of debt) as we discussed in our most recent weekly client video may also play a role in making it deeper than we might wish.

That is all part of the normal and natural cycles of the economy ebbing and flowing.

None of it should jeopardize your long-term goals. If you have too much of your portfolio in risky growth assets trying to squeeze too much return into a narrow time frame (immediate gratification), you are gambling. Pure and simple.

It is human nature to see stock markets rising and want that in your portfolio. But you may not need it. If your Wealth Forecast suggests that you need considerably less risk in your portfolio, then why do you want to chase returns that might, in the end, blow up your whole plan?

It is a common discussion that I have with many folks.

The point is that you need to survive the cycle intact. The greater the risk of downtime (actual capital losses) that you expose yourself to, the longer it will take to recover the lost ability to keep the positive compounding working for you and the longer you will end up taking to get to your end goal.

The biggest risk is not being able to get to your end goal. As experts in managing risk, we know that solid long-term results are the result of well-managed risk: appropriate asset allocation and balance (and re-balancing) and reasonable fees.

For each investment we put in our High Rock models, we do hours of assessment on the risk factors in owning that asset. Regression analysis allows us to put a relative risk factor (potential standard deviation from the mean in times of crisis) on each investment so that we can determine what the potential damage might be before we add it to the model or portfolio, so as not to overwhelm our disciplined investing process.

This is intended to stand up through the full economic cycle: good times and bad. 

There are some assets that new clients already have in their portfolios (when we first see their holdings) that astound us. More often than not, those investments have caused them (or have the potential to cause them) a great deal of unnecessary mental anguish that they really don't need to have. Calling into to question, who actually helped these folks get to this point.

So, when we are called into action, we love to bring our expertise in to the equation and get these issues resolved and our new clients on the best path forward.