2019 Predictions

Most forecasters and analysts are usually pretty wrong trying to predict the outcome of the next year in financial markets: Cash (and near-cash equivalent assets, like money market funds or high interest accounts) was king in 2018. My 2018 predictions suggested that most asset classes would end the year lower as liquidity dried up on the back of interest rate increases and increased US government borrowing needs. Ray Dalio, a billionaire fund manager, Harvard educated and probably way smarter than I am, suggested (at about the same time) that anybody holding cash was going to "feel pretty stupid". But what do I know?

Most of these folks have an agenda and are out selling their agenda. I have an agenda too: trying to get the best possible risk-adjusted returns for our High Rock Private Clients, working hard to move them towards their long-term financial goals in a fiduciarily responsible manner at as low a cost as makes good sense. 

Which is why we have had an over-weight cash / underweight equities position in our global equity model for most of 2018. If you read Monday's blog or have had way too much idle time to follow this blog on a semi-regular basis, you will know that I believe that we are at the end of the economic expansion cycle and there may be more volatility to follow. What keeps me up at night is the possibility of a repeat of 2008 (see chart at the top), which if you recall saw the S&P 500 drop 53% from its 2007 highs to its 2009 lows. While I put a low probability on this happening again, I have learned in my 35 plus years of experience to never say "never". Did you see the "Miracle in Miami" last Sunday?

But more realistically, a drop to the "Bull-Trend" line of about 13% has a much greater probability of happening. The bulls will still be right if it holds that test (and there are no shortage of them talking up their positions in the media, even now). That would represent about a 22% correction from the highs, which the media would jump on to say that we were in a new "bear market", but we can ignore them.

We are itching to put our client's money back to work in the equity market, but my past experience has taught me (usually I am early to the party) that we can be a bit patient. I remember  2014  when it would have been much better to have waited until late 2015 / early 2016. Hindsight is 20/20, but, best we learn from our experiences not to make the same mistakes. I should have fought harder for my clients back then. I do now.

Will it happen in 2019? Possibly, but there are so many loose ends in the global economic, financial and political situation that it is really hard to see how it will all unfold. That is not so different from how things looked at this time last year, other than US tax reform, which everybody was so taken with. Now we will deal with the increased US deficit that this has left in its wake. Debt is still a real problem in the global economy and an economic slowdown, which we expect will happen (perhaps even a recession) because we are at or near that point in the investment cycle, could very easily exacerbate this. Higher interest rates from the US Federal reserve have been biting.

The good news is that once we get through the slowdown, or more likely during the worst of it, equity markets will bottom and there will be some excellent opportunities to take advantage of that we have not seen since late 2015 / early 2016 when risk was considerably lower and certainly much lower than it was in 2017 / 2018.

Wishing you all a very happy, healthy and prosperous new year!

Active, Passive Or A Combination?

Once you know your asset allocation strategy (at High Rock we use a Wealth Forecast, prepared by our very capable Certified Financial Planning professional to discover your goals, time horizons and risk tolerance, which allows us to understand what the best strategy should be), then you can determine how you best want to execute it.

If you are a Do It Yourself (DIY) type, or perhaps an Assemble It Yourself (AIY) type, you best have a look at Larry Bates' book Beat The Bank first, there are lots of things in there that will assist and you can figure it out for yourself. 

If you think that you can beat the market (active investing), by all means have at it. Many have tried and, for a while they may have found themselves able to pick their spots to enter and exit, but sooner or later they fail, miserably.

Even the so called "experts" who manage the mutual funds that so many Canadians pay so dearly for (seriously friends, 2.5% MER?), with all the requisite degrees and training have serious difficulty in matching their benchmark index (of which they are expected to beat in order to justify their huge fees).

Last stat I saw, suggested that only about 20% are able to beat their benchmark target. It could well be lower this year!

Nonetheless, if you think it is daunting, as many do, and you do get rattled by market volatility, which may or may not invite you to question your entire strategy, there is some room for looking for and taking guidance from the pro's.

If your pro tells you that they can out-perform the market, you know that about 80% of them are telling you a tall tale. Remember, they also have to tell you (absolutely required by the regulators) that past performance is not a guarantee of future returns. There is a reason for that!

So there is a great reason to take a more passive approach, buy easy to understand, low MER, index Exchange Traded Funds (ETF's).

If you are starting out with a big chunk of cash, popping it into a bunch of ETF's may be a good idea, but if you are like me, you may not want to do it all at once. After 35 years in the trading/risk and investment business, I have come to recognize that there are times that buying makes good sense (usually when everyone else is selling and scared) and there are times when it does not (when everyone is throwing caution to the wind and complacent about risk).

Because all things economic are cyclical (see the above chart), there are times when stocks represent good value and times when they do not (i.e. they are expensive). Generally if stock prices (pale blue line) are at a point where they are lagging below earnings estimates for the future (dark blue line), they are of some potential value. That might be a reasonable time to get fully invested in that particular index ETF (in this case an S&P 500 ETF). If not, it might be time to wait.

Nobody who wanted to invest in 2016, wanted to wait until 2019 or 2020 to get to put money to work, so you can do some partial allocation in the meantime to a passive index (there were some opportunities available through this time period where a correction occurred and provided a better opportunity).

Point is, there is room for both passive investing and smart decisions about relative value, especially if you accumulate savings over certain time periods. If you blindly popped your money into the S&P 500 in January or August of this year, it may be quite some time before you will see it at those prices again. If you can live with that, great. However, most humans are emotional creatures, it is what gives us our humanity.

Pain is something that we find difficult to tolerate and pain is something we want to remedy very quickly. That is not good when it comes to investing and/or sticking to an investing strategy.

That is why some of us experts (Paul and myself anyway) choose to manage our money with a passive core in our portfolio, but also with some tactical and value oriented approach to it as well. We find that from a risk-adjusted perspective,  it tends to smooth out the bumps over the longer term. So that's how we invest our money and invite like minded folks to join us.