Short-Termism

According to the CFA Institute, Short-termism refers to an excessive focus on short-term results at the expense of long-term interests.

Short-term performance pressures can result in an excessive focus on quarterly (or yearly for that matter) performance, with less attention paid to strategy, fundamentals and long-term value creation.

It is a problem at the corporate level because investors, so very focused on instant gratification, pressure boards of directors and C-suite executives to increase their efforts on getting a better share price in the near-term over spending on long-term investment research and development opportunities. This has been prevalent with the ongoing share-buyback programs that have helped drive share prices to their current levels.

This same short-termism is also prevalent at the Wealth Management level. So often I hear the conversations that are focused on the most recent returns (much of which is usually just "hearsay") which can include all sorts of different measures that render comparisons relatively useless.

Compared to the benchmarks? which, as I suggested in a blog last week, are basically flat thus far in 2018 and with what kind of risk profile?

If you have got a 7% year to date return you are likely over-weight in the U.S. equity market. That may be good for the moment, but it may also be very fleeting. That 7% could vanish in a matter of days if we see the kind of volatility that we saw in February return to haunt equity markets.

At High Rock we make the best attempt to focus on the Long-term. Our client's Wealth Forecasts can stretch out over decades (depending on their age of course). Over decades we are going to have multiple economic and investing cycles and within each of these cycles there are going to be optimal times for investing and taking risk.

Taking large amounts of risk now, at the tail end of an economic expansion can be portfolio suicide. Taking appropriate amounts of risk at the appropriate time (best time to take more risk is at the beginning of the cycle when everyone else is fearful of risk) and managing this process is what we are paid to do.

That and to get the best possible risk-adjusted returns over multiple years to meet your goals over decades-long time horizons for retirement and beyond (depending on your personal goals of course).

Chasing short-term returns at the expense of your long-term goals is gambling. At High Rock, we are stewards of Wealth, not gamblers.

Investor Protection Takes A Step Backward

Deferred Fees or Deferred Sales Charges (DSC) on mutual funds are an enormous conflict of interest for an investment advisor.

As a client of someone who proposes to sell you one of these funds you need to know some basic facts that you will likely not be told up front.

You will be told that there are no sales fees up front and that if you hold them for seven years (or so), you will not have to pay any sales fees.

You likely won't be told that the annual management fee (MER) that is automatically deducted is in the vicinity of 2-3%.

You certainly won't be told that your advisor is being paid by the mutual fund company, likely about 5% up front on the sale to you of the fund.

Think about the conflict of interest there:

1) As long as you are, at the moment of sale, considered "suitable" for this investment (standard "Know Your Client" rules and regulations), that is the end of your advisor's legal responsibility to you. You are on your own and stuck for 7 years unless you pay a hefty penalty.

2) Ask yourself, who the advisor is actually working for? You (who pays him/her nothing) or the mutual fund company, who pays her/him the 5%. Plenty of studies have shown that investment advisor's skew sales of mutual funds to the companies that pay them best. Think about it. There is no advantage to you, the unsuspecting investor.

3) After your advisor gets her/his 5%, what incentive is there for them to look after you. Nothing financial, anyway.

4) In fact there is a huge incentive for your advisor to insist that you exit your fund early, pay the penalty (because he/she has found something "better" for you) and slip you into a whole new fund while pocketing another 5% commission.

I have seen it happen in my years as a branch manager and it is a shameless money grab and a very shady part of the investment business. However, it is extremely lucrative for the advisors and the investment firms and banks for whom they work.

This is bad news for the investing public.

But for us it is great news, because as more and more investors become aware of the lack of protection from the regulators, we will see more and more clients coming our way where they know that we have dedicated ourselves to looking out for their best interests.

Our Voluntary Code Of Conduct for The Stewardship Of Your Wealth

Managing Expectations

Last month I wrote a blog called "Perspective On The Bull Market for Stocks". Possibly, as it was the middle of August, some of you may have been enjoying summer vacation and not wanting to stress yourselves with reading my drivel. Smart move. Now that we are back "to school" or work, it appears that a few of you are looking at the progress of your investment portfolios year to date to find that they are not a whole lot changed from the beginning of the summer, or for that matter, the beginning of the year.

Another blogger / financial advice giver (way more popular than me and a significantly more prosaic writer) continues to suggest (without the disclaimer that past performance is not a guarantee of future returns) that a globally diverse and balanced "60/40" portfolio works best. 

As I stated in my August blog: a 60% global equity portfolio (as measured by the All Country World Index ETF (ACWI) combined with a 40% Candian Bond Index ETF (XBB) portfolio would have grown at about 5.5% annual average compound return over the last 10 years.

However, my friends, this does not mean that in the future you can expect to see a 5.5% return each year. you are likely going to have some disappointing years of under-performance (like 2011, 2015 and 2018 thus far) as well as some fantastic years of out-performance (like 2009-2010, 2012-14, 2016-17), which average out, over time to that 5.5% annual average compound return.

Look at equity global markets for 2018 (to date):

The light blue line in the above chart is the All Country World Index. It is basically flat on the year. The Canadian S&P/TSX (not on the chart) is lower by about 5% and China (part of Emerging Markets) is down about 23%. Only the U.S. is up and it is not broadly up, it is led by a few key stocks.

So it is tough to imagine how a broadly and globally diverse portfolio could be anything but flat.

The Canadian bond index is down, but with interest included (i.e. Total Return, it is also flat.)

Canadian High Yield (which High Rock clients will likely have some exposure to) is up on the year, so far by about 3.8% (DEX High Yield Bond Index). So if your portfolio is positive, that is the reason.

My portfolio is positive on the year, not by a lot, but still positive and my portfolio has the exact same assets as my business partners Paul and Bianca and the rest of our clients (but possibly with different allocations of those assets).

The year is far from over, so who knows how it will end. We suspect that there will probably be the potential for a great deal more volatility into the end of 2018 and on into 2019 (for global economic and geo-political reasons) and we will be prepared to take advantage of investing opportunities as they arrive. We do not believe in the buy and hold "60/40" as our prose filled (tells a darn good story) blogger/advisor does, so we will have plenty of cash equivalent assets on hand to be able to put those opportunities to work.

We do invest for the long-term because most of us have a considerable amount of time left on this planet and many of us also want to leave a growth oriented (better than fully taxable GIC's, which do not keep up with inflation) portfolio to our beneficiaries when we depart.

Oh yes... and the disclaimer: past performance is no guarantee of future returns, but at High Rock we work really hard to get our clients the best possible risk-adjusted returns.

Remembering 9/11

September 12, 1994 was a Monday. Andre Agassi had won the U.S. open tennis championship the previous day. I caught the 5:36 am train from Port Washington N.Y. (north shore of Long Island) to Penn Station and then the "E" train subway to the World Trade Center. Three elevators and 104 floors later (I used to joke that my vertical commute took about just as long as my horizontal commute!) and at about 6:45 am I took my post on the Canadian bond desk at Cantor Fitzgerald. We were situated right at the window on the northeast corner. Although my back was facing it, if I swiveled in my chair, that photo above was pretty much my view.

Seven years later, to the day, the attack on the World Trade Center took place. With good fortune, I had been recruited to return to Toronto in the spring of 1995 to work at the investment dealer Richardson Greenshields. To this day I always take a moment to remember my good friend, currently a client and member of our advisory board at High Rock who helped convince me to make the move back. He probably saved my life. However, there were a great number of former friends and colleagues who did not have the same good fortune, including the two really excellent gentlemen who managed our division, Don Robson and Joe Shea. 

A number of good friends and former colleagues had also had the good fortune to have found other opportunities since I had left and the whole Canadian bond desk had been relocated to Toronto. Nonetheless, we lost some really good folks on 9/11 because anybody who reported to work at Cantor Fitzgerald on time that day was lost.

My experience is nothing relative to the family members and friends who were significantly closer to those who were lost, but it still remains personal, these 17 years later.

Watching the events unfold on television on that day was surreal, like watching some fictional thriller. Unfortunately it was not fiction.

I do remember in the after-math, that there was a great deal of unity and reaching out across political and religious lines and of people showing a great deal of their humanitarian virtues.

At times, as we move farther away from 2001, it appears that some of those wonderful virtues have receded and we do not make the same efforts to find compromise around politics and religion.

For me, remembering 9/11 (i.e. "Never Forget"), is about how we all came together in response and became, for a time, significantly more tolerant of each other, despite the vast differences in our views and opinions.

I find the news headlines, opinion columns and blogs of more recent times to be full of an enormous lack of tolerance for those who might have a different perspective.

Perhaps we are forgetting a little of what 9/11 taught us. I think we all need to think back to that terrible day and remember how it made those of us who survived become better people.

Be Careful Friends, All Financial Writers Have An Agenda

We want your attention and then we want to sell you on something. In my case, I want you to think about a few things that we believe you should be considering carefully:

1) Who you are investing with / through and why?
2) What you are paying for and how much it costs (fees matter)?
3) What level of responsibility your advice giver is taking? (i.e. are you getting legal fiduciary care? see my most recent blog)

My agenda is to help you think about making good choices and perhaps, if you are the right fit, joining our 100 or so client families in working with us at High Rock.

Others want to hook you into their newsletters or blogs so that you sign up and pay them for their opinions. Generally, they may be pretty well-established financial writers with some pretty good credentials. Problem is, for every opinion you get that points in one direction, you are probably going to get as many others that likely point in another. You are left to pull the trigger, which is never an easy role. Timing can be extremely important with these folks.

And of course there are the myriads of "free" tweeters and bloggers who flaunt the regulators by suggesting things like:

 "even during the 2008-10 financial crisis a balanced portfolio returned an average of 5% a year while stock markets cratered 55% and took seven years to recover".

This writer might have forgotten that the financial crisis happened in 2008, the stock market bottomed in 2009 and was recovering soundly in 2010. Nonetheless, sometimes they can be misleading.

But more importantly, when suggesting that things like: "stick with 60/40 it works" they don't include the required (by the regulators) disclaimer: "past performance is not a guarantee of future returns".

Or this bit of newsletter advice (in contrast) that I was recently sent by a good client: "You need your portfolio to both participate and protect. Don't blindly buy index funds and assume they will recover as they did in the past. This next avalanche is going to change the nature of recoveries as other market forces and new technologies change what makes an investment succeed. I cannot stress that enough. Do not get caught in a buy and hold, traditional 60/40 portfolio. Don't walk away from it. Run  away."

Some are cheerleaders for the stock market when it is making new highs because they want to inspire you to be buying while they are at the same time quietly taking sales and profits. On the flip-side, there are those who want to scare the pants off of you so that you will sell into their stealthy bid.

As a practical skeptic of all financial writing (when it is news it is likely too late to be getting involved), we take it all with a proverbial grain of salt.

We do our own research and we make our own, independent decisions, based on all the  material that we deem important. Especially the stuff that is not front page news.

We might write about it from time to time (or discuss it in our weekly video) as it is some (likely not all) of our thinking behind our decision making processes.

Importantly, before you buy into anybody's writing, give some thought to what they are trying to sell you and ask yourself why?

Good advice is never free!