For 2020, Expect The Unexpected (Again)

"It's still a bull market, things are going from the lower left to the upper right and will continue until they stop" said Dennis Gartman to Bloomberg's Tom Keene on a Bloomberg Surveillance podcast on December 19 shortly after announcing his retirement after a 30 year career as an investment writer. Asked about what to do for 2020, he suggested: "pray". He also quoted famed economist John Maynard Keynes who, back in the 1930's stated that "markets can stay irrational far longer than you and I can remain solvent".

There are plenty of opinions on both sides of the bullish/bearish equation and while, at the moment, the bulls are in control (The American Association of Individual Investors had the bull camp at 44.1% on December 18th and the bear camp at 20.5%), this was the case just before the December 2018 debacle.

It is no surprise to any of you who read my blogs that all this bullishness makes the hairs on the back of my neck stand at attention. My contrarian nature, after witnessing the last 40 years in financial markets has me in super caution mode (as far as stock markets are concerned). 

According to a newly transferred-in client, their former advisors warned them of my (our High Rock) large position in cash. How they can make that claim certainly amazes me as each of our clients has very different and tailored portfolio strategies, but nobody has more than 1% cash. We may have an underweight exposure to equity markets which means that we have more exposure to High Interest Savings funds (which offer approx. 1.95% in annual interest) until we see better valuations for investing in stocks, but that is not cash.

Unlike many advisors, as portfolio managers, we offer our High Rock clients the option to be invested in the same assets (same mandate) as we (Paul, Bianca and me) are (% weightings varying according to our individual strategies as determined by our Wealth Forecasts). Which is always their choice. A choice that can, at any time be adjusted to be more or less aggressive than we might want to be. It clearly minimized the downside in 2018, but likely limited the upside in 2019. If stocks continue to rise, 2020 will possibly be a year of under-performance. If volatility returns in 2020, our clients will be protected. Regardless, every client with a Wealth Forecast will progress towards their long-term goals while we manage the risk associated with achieving them. As we will always say: why take more risk than necessary and increase the chances of not achieving your long-term goals.

So 2020 will likely provide opportunity to put more money into stocks as it has in the past:

And we will look to find those opportunities when they are presented as we have done in the past, but we will do it when we believe, for our own portfolios, that it makes good risk-adjusted sense for our own strategies and for those clients (the large majority) who have entrusted us to look after their long-term financial goals.

2020 will bring plenty of challenges to the global economy and the geo-political environment. The U.S. Federal Reserve issued a report suggesting that President Trump's trade policies have (no surprise here) levied a negative impact on U.S. manufacturing. The U.S. deficit is ballooning (lower tax revenue and increased spending) in times of economic growth, which limits the ability of the U.S. treasury to be able to assist in an economic downturn. The Phase 1 trade deal between the U.S. and China will not have any immediate impact, so in the lag time, there will be plenty of uncertainty. 

Canadian GDP growth was negative in the first month of the final quarter of 2019 and confidence is slipping. Bank of Canada inactivity on interest rates may in fact be hurting the economy as rising bankruptcies have become a problem with household debt levels at close to record highs and debt-servicing costs rising. If unemployment rises, marginalized high-debt households will only exacerbate the bankruptcy situation.

As our good friend David Rosenberg suggested in his December 20 Breakfast With Dave letter: "the stock market has a mere 7% correlation with the economy today... this has never happened before... Normally, what the economy is doing explains at least 50% of the moves we see in equities...But not in today's controlled landscape driven by algo's, leverage, ETF flows and central banks".

If stock markets continue to rise, we will continue to capture the benefits, but perhaps at a more conservative level. If they don't, we are prepared. So, why take on more risk (as stock prices rise, risk increases) than is absolutely necessary (for your long-term goals)? 

Of course you can, if you want to, your money is your money. With my money, however, I prefer to be more cautious and that has benefited me in the past and will likely do so again in the future. My eyes are on my long-term goals.

Wishing you all a happy, healthy and prosperous 2020!!

Are You More Than Just A Number ?

In our High Rock survey that we conducted through November, we asked our clients what they thought of our client service. While we are of course thrilled at the 86% that find it above average or better, we realize that we have work to do to improve for those 14% who think it just average. 

Point being is, we want to improve. We want to give our clients the best client experience possible. Our team has very defined skill sets and we want our clients to be able to take advantage of them all. With how many investment advice groups do you get direct access to the portfolio manager (if you want to talk specifics or just get a general sense of their thinking process and research)? If your advisor just puts you in a bunch of mutual funds, there is zero chance you will be talking directly to the portfolio managers of those funds (you might be sent a summary, if you are lucky). You are not getting a whole lot of attention for the 2% MER that you are paying. You are paying them, but they don't want to be bothered by you. So they hide behind their screens hoping that the sellers of their funds (the advisors) will maintain client control.

Life is dynamic, so no matter what your original plan (Wealth Forecast) is, there could easily be something that comes up to force you into a decision for change. Our Certified Financial Planning (CFP) professional, Bianca Tomenson, is on standby 24/7 if you need to generate a "what if" scenario or two to assist you with that decision making process. Oh, and by the way, it is all inclusive in our 1% management fee (plus the 0.15% custodial fee charged by our partner RJCS who manages all the back office activity, and holds your accounts, protected under the Canadian Investor Protection Fund (CIPF)).

If that decision requires an adjustment to your portfolio strategy, then we make it and implement it. There are no additional trading costs to you.

The financial institutions of today are scrambling to cut costs and increase efficiencies and profitability at every corner. The highly impersonal robo-advice world believes that they can do this with technology and maybe they can: be better at profitability. 

Unfortunately, they leave out the human element of personal care.

Our new clients are coming to us because they feel frustrated by just being a number at a financial institution, concerned that they don't have a tailored solution to reach their financial goals and tired of overpaying.

I don't suppose you (or anyone you might know) have similar frustrations or concerns with your wealth planning and investment situation?

And Now, For Something Completely Different!

(With apologies to the Monty Python folks) 

I will let those who consider themselves expert in the field to determine how effective the U.S. - China Phase 1 trade deal will be, although I might be so bold as to suggest that it was likely done more to placate stock market participants than creating anything of significant substance. Ultimately, time will decide. As for Brexit, again, I suspect that the headline election results take away some uncertainty, but the ultimate impact on the U.K. economy and the implications for another Scottish referendum are still going to hang over the U.k.'s economic outlook.

In the meantime (for something completely different), lets look at some of the things that are going on behind the scenes that few are paying much attention too.

While stocks are making new highs, the global economy continues to struggle (and there is no immediate relief coming from the U.S. - China deal and / or the U.K. election):

The U.S. consumer provides about 2/3 of the economic growth for that particular country and with both the manufacturing and service economies struggling, has been supporting all the recent growth. Today's retail sales data for November fell short of expectations:

And despite President Trumps emphatic claims of the best economy ever, it would appear that there is little now supporting GDP growth moving into 2020.

While he also likes to tout the refrain "Jobs, Jobs, Jobs"... Average employment growth (pink line) has been actually trending lower:

And the number of Americans filing for unemployment benefits unexpectedly increased by 49,000 to 252,000 in the week ending December 7. The highest number since 2017 (it does appear that these numbers are starting to go the other way):

And finally, way in the background... what drove stocks higher through 2014, was Quantitative Easing, which grew the U.S. monetary base and heaped liquidity on the financial system. Since late 2015, the U.S. Federal reserve has been drawing liquidity out of the financial system (tightening monetary policy and raising interest rates). While there have been three rate cuts in 2019, the monetary base has barely grown and the divergence between the S&P 500 and the monetary base has continued to widen significantly.

With all of the good news built in to stock prices, it remains to be seen what the not so good news might do when it actually starts to matter. Stay tuned.

Setting Our Goals

We all need coaches. If we are sports fans, we see it first hand: the folks standing behind the bench or on the sidelines, mostly behind the scenes, responsible for preparing their charges for a game, event or competition. My daughter Miranda (a world class triathlete in her own right) coaches triathletes (that's the crazy sport where they swim, then cycle then run for staggering periods of time) who simply just want to improve their performance. 

I have a coach (Greg Wood of Sandler Training). I wish I had met him years ago, but he is helping me to build my/our business, which is, as it turns out, financial coaching. Yes, we (at High Rock) are indeed coaches. 

And that, to a large degree, is a huge differetiator in the world of financial advice. Our coaching expertise comes from a broad range of experience and education (from financial planning to managing investment risk and portfolio strategy), that gives us the ability to work with our clients to help them get to their financial goals.

We all have goals. Sometimes those goals are just vague ideas of some far off notion of how we would like to live our lives in the future. The key is to set aside some time and start to build a clearer picture of exactly what those goals are be they long-term, short-term or regular, day to day goals.

When we set a goal, be it personal or financial or athletic, and make it very specific, it starts our psyche churning and we begin to think about how we are going to motivate ourselves to achieve it. We start to focus our behaviour on creating a plan of the actions that we need to take to make it happen.

This is not rocket science by any means and at the outset, may seem pretty simple. However, to be successful in achieving our goals, it will take planning and more importantly, likely having to challenge ourselves to be disciplined in our approach.

When we prepare Wealth Forecasts (the High Rock version of a financial plan), sometimes it becomes a bit of a task to get our clients to focus on getting the important financial details to us (sometimes it is not a first priority) or we get the Wealth Forecast prepared and presented, but it takes some effort to motivate them to sign and return the (regulatory mandated) paperwork so that we can put it all in place. Perhaps it is just not making that TFSA, RRSP or other contribution to your savings / investments? Sometimes needing to adjust your preconceived notions (usually a result of receiving historically bad advice or coaching) of exactly what will and won't work in managing your strategy. 

However, just as if we are training for that personal best time in your next triathlon (or whatever sport you might participate in) or maybe you are just trying to keep healthy with exercise, if we miss our workouts, we are not staying disciplined and our goals may become somewhat more distant. 

That is behavioural and it is behaviour that drives success.

Every coach (worth their salt) wants their clients to be successful. However, the behaviours that we need our charges to undertake that are necessary to be successful (discipline, risk-taking, prioritizing) have to be as much a part of the process. So behaviour also drives attitude! Creating behaviours and holding yourself accountable takes effort. That effort will ultimately determine whether you will be successful in achieving your goals.

So, as we close out the year and prepare for a new one and as we close out the decade and prepare for a new one, maybe use the December downtime (likely between December 25 and December 30) if there is any in your schedule, to give some thought to your goals, your plan and your actions that will bring you all the success that you want in the future.

And if you want some financial coaching, we have a fine team to support your efforts.

Bank Of Canada Sees A Different Economy Ahead

While Business Confidence tends to lead Canadian GDP (above chart), it is clearly making lows not seen since 2015 (when the Canadian economy dipped into recessionary territory, i.e GDP growth fell below 0).

Somehow, however, the BOC, in its decision to leave interest rates unchanged earlier today, sees something better:

"There is nascent evidence that the global economy is stabilizing, with growth still expected to edge higher over the next couple of years"

I did have to look up "nascent" (to get the exact meaning): just coming into existence and beginning to display signs of future potential.

Apparently this is something that Canadian Business is not seeing. Which means that either the BOC is looking through a rose-coloured crystal ball or Canadian Business is not seeing the brighter future. 

The BOC acknowledges the risks: "Indeed, ongoing trade conflicts and related uncertainty are still weighing on global activity, and remain the biggest source of risk to the outlook."

I would suggest from recent headlines that the ongoing trade conflicts are not going away in any hurry and even if some solutions are found, there is going to be a considerable lag between the time of implementation and the benefits from any resolution.

So, obviously, I remain in the cautious camp with the rest of the Canadian business folks who are less confident.

The real reason that the BOC won't lower interest rates, unless they absolutely have to is because they are worried about the Canadian household coming to the trough if lower rates should happen: "The bank continues to monitor the evolution of financial vulnerabilities related to the household sector."

The real vulnerability is employment. If the less than confident businesses start taking cost-cutting measures by reducing employment, the over-indebted and vulnerable households will start to feel it and so will the two things that are supporting the Canadian economy: the consumer and the housing market.

That may show up in November's employment / unemployment data (Labor Force Survey to be released this Friday) or even in future employment reports into 2020.

We will also get a glimpse at how U.S. business confidence is driving employment / unemployment this Friday.

As President Trump stated yesterday in London: "If the stock market goes up or down - I don't watch the stock market... I watch jobs. Jobs are what I watch."

Perhaps the Bank of Canada will be watching too?

Are You Kidding Me?!

Banks Still Take Big Spreads On FX Transactions

For some, it is that time of year again: thinking about a warm weather vacation somewhere south. For me, I am heading to NYC (where I lived and worked for a number of years) for U.S. Thanksgiving to visit old friends and family. So for fun, I thought I would check in on the Canadian banks to see what they were charging regular folks to buy $US. 

Just for reference, the "spot" price on foreign exchange markets, the wholesale market, where a standard trade is about $5,000,000 (and the place where I began my trading career almost 40 years ago) is at about 1.3305 as I write this note.

That means that for every $1 of Canadian currency, you get $0.7516 of the U.S. version.

Like most Canadian banks, TD, as indicated above, wants to charge you 1.3641. That my friends is a mark-up of over 2.5% above the wholesale rate.  On $1,000 of Canadian Loonies, they are taking $25 of your hard-earned dollars.

For some that may not seem too daunting, but if you are going to be spending $10,000 of the Canadian stuff while you are away, that becomes $250. Not only that, it is a huge fee to pay in this day and age of transparency. No wonder banks are continuously making record profits.

How do you avoid this?

1) Open a $US chequing account at your favourite Canadian financial institution.

2) Get yourself a $US credit card (preferably with a travel award option, or other reward options).

3) Use your $US credit card when you are out of Canada and when you get your monthly bill, pay it off immediately, of course, but do so with the $US in your $US chequing acount.

4) How do you fill up your $US chequing account?

If you are a High Rock client, you just advise us to use $US cash that we have in your $US account with us. We always have $US assets that generate income from interest and / or dividends and we can electronically move it to your $US bank account within a couple of business days.

We always buy $US for our clients on the wholesale market (because we usually do it in bulk) and we tend to be somewhat tactical when we do so, adding when the $C strengthens.

Otherwise there are plenty of alternatives out there who will give you better than bank prices, just do a little on-line research.

Many Canadians have chosen to put their full faith and trust in Canadian banks and financial institutions because that has been the way that they have been taught (usually by the vast marketing efforts of those institutions).

That trust has become, obviously (as in the evidence above), very expensive (helps to pay all those advertising costs, I suppose).

I / we are of the lonely (but growing number of) voices trying to spread the word that there are alternatives to the old system and it may just be time for those of you who have not yet done so to explore the options and find some more efficient ways to manage your wealth.

While Stocks Soar, Economy Tumbles

While stock markets built in a perfect outcome for a trade solution, the economic deterioration continued as retail trade and industrial production releases on Friday pointed to a significant reduction in Q4 U.S. GDP:

That would put annualized U.S. GDP for 2019 below 2%:

Meanwhile Earnings for Q4 and Q1, 2020 are being revised down further:

Which, if you pay attention to the fundamentals (which apparently are currently out of fashion?), makes stocks look even more expensive:

When this happens, when the world just does not make much sense, cautious folks, like us at High Rock, tend to be thinking more of capital preservation and risk mitigation.

Opportunity always comes to those who are patient.

Harvesting Tax Losses

If you have capital gains that you have incurred in 2019 in the non-registered part of your portfolio, you might consider taking some tax losses by selling investments that are down so that you can take a capital loss to offset your 2019 gains and reduce your tax burden.

Tax rules state that you cannot buy that same security back for another 30 days in order to maintain the capital loss. However, you can replace it with a similar security, perhaps another ETF of like holdings so that you don't miss out on the possible recovery of that asset or asset class.

You should talk directly with your advisor on this matter, in order to do what is best for your own portfolio and tax situation, but with the preferred share ETF down some 15% over the last couple of years, this may be one area of opportunity.

High Rock private clients have had very little exposure to preferred shares, but the volatile interest rate environment has certainly created some problems for the rate-reset preferred share markets in Canada. Sometimes you have to weigh the risks of a higher dividend yield (like that which preferred shares offer) against the potential downside. CPD (above chart) offers a very attractive 5% dividend yield, but a 15% decline in value and a 0.5% MER, leaves you well into the negative. Sometimes having an exposure to a money market fund (cash equivalent) that pays 2% becomes a smarter option. I would take the 2% over the -10%, any day. That being the case, because I /we invest in the exact same securities as our clients (which is not always the case in the advisor community), our cautious stance, can have, in time, its benefits. We manage risk first, with a view to providing protection to our and our client portfolios capital when it appears to be at higher than normal levels of risk.

Canadian High Yield bonds have also been a better risk-adjusted asset class, with little correlation to interest rates and / or stock market volatility: (TXPRAR is the TSX preferred share index). Annualized Standard Deviation = Risk.

The one thing to be weary of, and the reason to be asking for assistance / advice on the tax-loss harvesting, can be the timing. If lots of folks are running to the same exit, it may get a bit tricky and could artificially and temporarily push prices lower. That being said, it may also provide buying opportunities for those who have cash / cash equivalent.

A Conversation With A Prospective Client

We (at High Rock) recently undertook a client survey with about 9 questions (quick and easy), mostly centered around our communications: blogs, monthly video, quarterly reports, semi-annual reviews). The lead-off question (above graph), however, was intended to affirm (or not) our view that most of our clients were thinking long-term in nature which came in at a pretty solid 97% (56% most concerned about meeting their Wealth Forecast (financial planning) goals, 41% most concerned about long-term Return On Investment (ROI)).

Me: So when it comes to your personal finances, what keeps you up at night?

PC (Prospective Client): Just making sure that I am going to have enough money.

Me: And what does that mean, to you, "having enough money"?

PC : A number of things, I suppose: being able to live financially independent, working at what we choose to work at, when we want to work at it. A good education for our kids, lots of travel, some philanthropy and something, in the end, left to our kids and some charities.

Me: Sounds like some pretty great goals. How far along are you with your plan? 

PC: We don't have any real plan, as yet, we have TFSA's, RRSP's, RESP's and some inheritance money in a savings account.

Me: A house? a mortgage?

PC: Yes. And I hate debt. I want to get that mortgage paid off as soon as possible.

Me: Absolutely! Debt can be a scary thing, especially when you are overwhelmed by it. What do you hate about debt?

PC: I guess it is just the way that I was brought up: debt was always frowned upon. 

Me: I guess interest rates were pretty high back in the 80's and 90's, carrying debt was a pretty expensive proposition. How do you feel when you see how low interest rates are now and the pretty significant amounts of household debt that Canadians have taken on?

PC: Higher interest rates frighten me.

Me: Sounds to me like it might be time to get down to the hard part and create a structured plan? We call it a Wealth Forecast. It is basically ground zero for all of the building blocks that you need for your investing strategy. When we understand exactly what you want to accomplish and over what period of time, we can then start to put together a long-term plan: what kind of portfolio growth you need, the kind of risk that may be necessary for you to endure and if you are comfortable with it.

Some years will be more difficult than others. Last year our balanced portfolios had small negative returns. This year they have, so far, bounced back nicely. However, we want to look at this in terms of decades, not years. Especially when you likely have more than four decades of life to go. Your plan has to take this into consideration, not every year will be at the average annual rate of return. We cannot control the economy and how financial markets might respond to it. We have to think in terms of what it takes to meet your long-term goals and the most efficient way to get to them: return for the risk taken,  taxation and the costs of investing.

Any idea of how much you are paying your current advisor and portfolio managers?

PC: We have a number of mutual funds in various accounts, our bank advisor looks after those. I am not sure what we pay.

Me: Do you think that might be worth looking into? 

PC: I tried to get her to show me, I didn't really understand it, but I didn't want to bother her more than necessary, she's pretty busy.

Me: I hear you. I bet it would be nice to have that made a little more transparent?

PC: I should pay closer attention, I think.

Me: Time to get down to the planning part?

PC: Let's do this!

Oh Cannabis

Flashback to June 21, 2018: PM Trudeau announces a legalization date of Ocober 17, 2018 for marijuana sales. I happen to be the guest host on BNN's The Street with Paul Bagnell and of course the topic du jour was the said legalization and all the Cannabis company stocks already involved in the feeding frenzy. At the time there were about 44 listed Cannabis companies on the TSX.  When Paul asked for my comments, I remarked on the number of listed companies, all with limited, no or negative cash flows and suggested that this would not end well (my well-informed opinion courtesy of my business partner Paul Tepsich's keen insight and research, in which he had stated that he would not touch this industry for investment on the cash flow issue alone). Of course speculation was rampant and we were thought of by some to be missing out.

I have not followed the story too closely, other than by virtue of news reports from time to time, but was brought front and centre to it again by a Globe and Mail story that I read over the weekend titled : "All Dried Up: How Bay Street Cashed In on The Cannabis Frenzy Before The Carnage" .

"With little access to fresh cash, Canada's licensed producers now face a new reality. They have spent years focused on financings to fund their expansions, paying little mind to positive cash flow."

"The vast majority of the companies are going to go bankrupt",said Igor Gimelshtein, the former chief financial officer of MedReleaf Corp."

 The chart of the Horizon's ETF, HMMJ (above) really does tell the story behind the emotion and psychology of bubbles.

The early excitement (left peak), the Fear of Missing Out (FOMO) (all time high peak and right peak), and the reality .

Technically referred to as a classic "head and shoulders" chart pattern.

"For all the money they made, the industry's original financial backers have now largely moved on to more promising U.S.- based companies, or are out of the sector altogether. Retail investors, meanwhile, are still heavily invested, holding 80% or more of many cannabis companies' shares".

"It is all too familiar a tale. As with so many bubbles, much of the smart money got out early, leaving behind retail investors who clutch shares with dwindling values - with little hope of recouping big losses".

Classic in many ways, but horribly devastating to those who bought in to the hype and have been subsequently crushed. 

Where was the fiduciary responsibility to those retail investors who took their advisor's advice to participate, when they were supposed to be looking out for their best interests?

High Rock chose not to participate because the industry lacked a basic fundamental. In turn, our fiduciary duty to our clients (do we want this for our own portfolios? Absolutely not!) was to assess the risk, apply it to our and our clients long-term goals and determine that there was no point in owning (investing in) the Canadian cannabis industry until real value (positive and predictable cash flow) became apparent.

That is how we boringly and methodically determine how to invest. Not because everyone else is buying into it and pushing prices higher (creating upward price momentum and the inevitable excitement). As I will always say, ad nauseum, if you want excitement, go to a Casino! If the value is not there, at some point in time, the smart money will figure it out (leaving emotions on the sideline) and bid adieu, while the more emotionally driven investors remain on "Hope Island".

We may apologize, from time to time, for erring on the side of caution, when we are uncomfortable with relative value. However, our fiduciary duty to our clients is to protect them when we see risk that does not make sense too us and to our/their long-term plans.

We are stewards of wealth, not gamblers.

Blockbuster Day Of Economic News Yesterday

First of the day, was U.S. GDP, which slowed to an annualized growth rate of 2% and would have perhaps been somewhat lower if consumers were not busy buying recreational goods and vehicles (at a 17% clip).

Interesting, when just the day before, the Conference Board's index of consumer confidence (forward looking) hit a four month low. Is that it for the U.S. consumer?

As expected, the U.S. Federal Reserve dropped the Fed funds rate by 1/4%. However they also suggested that they are done for now. Although, that will of course be dependent on future economic data, but the easing of trade and Brexit concerns (at least on the surface) has given Fed Chair Powell some breathing room, perhaps. This morning though, Chinese officials are apparently suggesting that they don't see a long-term deal happening with President Trump at the helm. So the saga continues. I can't say that making crucial investment decisions has been made any easier.

The Bank of Canada left rates unchanged. However, thy were decidedly down-beat about their outlook: "In today's updated projections, we are forecasting both exports and business investment to contract in the second half of this year and to recover only moderately in the next two years."

This morning the August Canadian GDP data came in at a lower than expected 0.1% rate of growth and while we have to wait for September's data (not sure why it takes Stats Can so long to get to it) until we see full Q3 results (in another month!), it would appear that somewhere around a 1.3% annual growth rate is in the cards. Hardly impressive (especially with inflation outpacing economic growth). 

So why is the BOC sitting on its hands? My guess is that Canadians have just too much debt and they are reluctant to encourage them to take on any more: "the recent strength in many housing markets across the country is a reminder that we will be carrying high levels of debt for a long time, despite a constructive evolution of vulnerabilities".

In the end, they are "mindful that the resilience of Canada's economy will be increasingly tested as trade conflicts and uncertainty persist". 

Well that does not help us much in making those crucial investment decisions, does it?

With 2% and falling growth in the U.S. , 1.3% and falling growth in Canada, 1.1% and falling growth in the Eurozone and China's economy growing at about 17 year lows (and Hong Kong is in recession), there is not a great deal of opportunity (at the moment) to get the balanced portfolio close to it's multi-year averages: up to it's 6-7% annual average growth rate, without taking on mountains of additional risk (stock markets at their highs = big risk in the short-term).

That time will definitely come (long-term investors will benefit), but in the interim, protecting your capital should be your first priority.  

Hope Island!

(with an assist to my coach, Greg Wood of Sandler Training)

Hope just does not get us to where we want to be. Action does.

Hope is not a high growth strategy.

As applied to the world of wealth and investment management, "hoping" that everything will work out in the end, hoping that stock market prices will go up (and your investment portfolio with them) is likely to end in disappointment if you do not have an actionable strategy. You need a plan. You need a plan to set your goals and take the appropriate steps to get to your goals, with long-term thinking. 

You also need to take risk (because risk - free returns, after taxes and commissions are running below the level of the increase in your cost of living), but that risk needs to be managed and mitigated as best as is possible.

There is plenty of risk and uncertainty abundant in the world today: Trade wars are in full impact mode, as our friend and well-known economist David Rosenberg reminded us on Friday: "Anyone who simply looks at this as a trade conflict is not looking at the forest past the trees. This is an economic war on an epic scale...this is a battle for economic supremacy".

China's economic growth has slowed to the lowest level in 27 years. Germany has slipped (or is about to slip) into recession. The U.S. economy will likely show annualized economic growth for Q3 at about 1.8%:

Which will put the full year ending at Q3 at about a 2% growth rate. The trend is clear, it is down and to the right and shows only signs of gaining momentum in that direction.

And the U.S. Federal Reserve will likely drop it's Fed Funds rate by 1/4% after its interest rate decision making (FOMC) meeting which ends Wednesday. They will not be doing this because the U.S. economy is showing signs of growth. Clearly, trade wars are the main destabilizing force.

Even the CEO's are uncomfortable. CEO's are not paid to sit around and hope. They have to prepare their companies for economic slowing.

And guess what? They are not hiring: job cuts are up about 28% in 2019. The highest since 2015. This may not be good for the employment growth data that will be released on Friday of this week: expectations are for about only 85,000 new jobs and a jump in the unemployment rate to 3.6 -3.7% (both lagging economic indicators). The slowing trend continues.

Meanwhile, we are about halfway through earnings season and the blended (actual plus estimated) results for Q3 are for a decline of 3.7% annual growth rate. This would be the third consecutive quarter of negative growth.

With share prices at record highs, I would suggest that there is a great deal of hope built into share prices: "trade optimism", lower interest rates.

However, behind the scenes, the picture is probably not so hopeful. Slowing economic growth, political problems, negative earnings growth, falling business and consumer confidence.

Hope won't protect your financial plan. Mitigating risk will. At High Rock we manage risk first, for the long-term. We don't chase short-term returns, that is gambling. We are stewards of wealth, not gamblers.

Wealth And Estate Planning 101

If you don't have a will (or an updated will), get on it. 

Especially if you have children who are not yet adults: you want to make sure that if something happens to you and possibly your spouse (at the same time) that they do not become wards of the state and incite some seriously harsh custody squabbles.

And then of course there are the financial issues.

If you have non-registered assets, they will pass through the estate. A non-registered investment portfolio of $1,000,000 will cost $14,500 in probate fees plus legal and administration costs and as Bianca reminds me, all the headaches that come with probating a will (especially when it comes to financial institution compliance).

You can avoid probate by making your non-registered portfolio joint (with a an expected survivor or survivors) which means that it passes directly to the survivors and remains outside of the will. However, if there are multiple survivors, that may make it extra complicated as to how the survivors deal with the assets. Money does have some unfortunate consequences on human emotions.

If you have life insurance, of course, that will pass directly to your primary beneficiaries or contingent beneficiaries (who are secondary beneficiaries if something should happen coincidentally to the primary beneficiary). If you are still young enough (so that the costs are not too astronomical), this may be worth thinking about. Then you just spend your non-registered assets (less tax for you to pay in retirement, because they have already been taxed) before you leave the planet and your beneficiaries get tax free money when you do depart.

Then there is your registered money: RRSP's, RRIF's, LIF's, LIRA's and your TFSA's. Make sure that you assign a beneficiary and perhaps contingent beneficiaries. As TFSA's grow over time (as opposed to RRIF's, LIF's and LIRA's which you will have to draw down), there will likely be substantial amounts to be inherited (no tax consequences to the beneficiaries). To ensure a smooth, tax efficient transfer of a TFSA to a spouse, you want to make sure that you designate your spouse as a successor holder (you can only designate your spouse) which means that your TFSA can roll into their TFSA and continue to be sheltered.

Wealth planning is not only about building your wealth, but also how to best utilize it with the least possible tax consequences  for your ultimate use or for your beneficiaries.

Make sure that you use a registered Certified Financial Planning (CFP) professional to get you the highest standards of planning assistance.

Special thanks to High Rock's CFP professional, Bianca Tomenson, for input in this blog.

As Cash Flows Into Money Market Funds...

Bank of America declares "the end of the 60-40" standard portfolio (Market Watch article).

Apparently, "in a research note published by Bank of America Securities, titled The End of 60 - 40, portfolio strategists Derek Harris and Jared Woodard argue that "there are good reasons to reconsider the role of bonds in your portfolio" and to allocate a greater share toward equities."

"The relationship between asset classes has changed so much that many investors buy equities not for future growth but for current income, and buy bonds to participate in price rallies" according to Harris and Woodard.

Not only is money flowing into money market funds but also into bond funds while investors exit the volatile equity market.

Apparently, with 1100 global stocks paying dividends with better yields than global government bonds (where there are billions of dollars of negatively yielding bonds), there is an argument for a larger weighting of equities in a balanced portfolio.

I would argue that adding the double edged risk of equities:

1) dividends are not guaranteed

2) equity prices can be very volatile

Is only going to add potential risk to a portfolio, especially if, as I / we (at High Rock) have been suggesting, that we are at or near the end of the economic expansion cycle (in the cash into money market fund graph above, growth in money market funds grows around the time of recession) that began in 2009. Note (below) what happens to dividend growth in times of economic slowing / recessions:

To a degree, the Bank of America folks are not entirely wrong, but what portfolios need more of are non-correlated assets as opposed to the traditional 60-40 mix. Assets that are not necessarily going to be as volatile as global equities or global government and investment grade corporate bonds, as we have seen lately, that drives investors to put more money into cash equivalent (money market) assets. 

Clearly, this circles back to my blog from last week: Alternatives To Volatile Stocks. 

For almost 5 years, High Rock has been working with clients to find them assets with more income generation that helps to reduce risk in a portfolio. If you can add legally obligated income streams (from Canadian High Yield bonds), it takes out the risk of the potential for reduced dividend payments from stocks.

We manage risk first.