What We Worry About

On Tuesday's monthly High Rock video for our private clients, we discussed the probability that we put on a test of the long-term bull-market trend line that extends back to 2009. We also talked about what happens if not enough buying emerges to provide support for that trend line. We feel that this justifies an under-weight equity / over-weight cash equivalent (low risk) position in our global equity model.

Many more passive oriented advice givers might suggest that this in the longer-term outlook is just short-term noise. I cannot argue too much with that view, because after all, our view is also longer-term for all of our clients (and ourselves) because, on average, our financial plans (at High Rock, we call them Wealth Forecasts), which are crucial for determining asset allocation strategy, extend between 20 and 40 years into the future.

We just feel that being fully invested, at this late stage of the economic cycle is going to put some short-term pressure on the portfolio. December 2018 was the worst month for stocks since 1931. January 2019 was the best month for stocks since 1987. The very astute David Rosenberg constantly reminds us of what happened following the great January 1987: October of 1987, "Black Monday" (for those of you too young to remember, it was a big stock market crash of some 22%).

Are we 100% certain of this pull-back in stocks? No. Otherwise we would be 100% in cash equivalents in our global equity model. But the economic evidence for a slowing or even a recession around the globe is mounting, daily. It would be highly unlikely to have a recession without some downward pressure on corporate earnings, which does not bode well for stock markets (despite whatever position central bankers take).  Higher interest rates on record amounts of global debt are already taking their toll with more expensive costs for servicing that debt. So we are comfortable taking a prudent approach to the holdings in our portfolios.

If you are fully invested in a passive ETF portfolio, you will survive the next recession: even through the financial crisis of 2008, most balanced portfolios returned to positive performance within a year and a half if left untouched. If you can live with the negative portfolio performance until we get through the next recession, stay the course.

However, our clients pay us (but only slightly more than a robo-advice portfolio manager) to get them better than the benchmark index returns and certainly better risk-adjusted returns (return per unit of risk taken). So we need to be constantly looking for better than passive investing opportunities.

Having cash equivalent assets allows us to take advantage of these potential opportunities that our experience tells us will happen (eventually), if we are patient. 

But we also worry about investors who are paying fees (either in a fee-based account or worse, in a collection of expensive mutual funds) for passive portfolios that are fully invested, because while markets may go down, you will still be paying fees to your advisor and / or mutual fund manager (MER). That means a longer recovery period.

If our High Rock portfolios go down, as they did in December, they bounce back more quickly: they were higher at the end of January than they were at the beginning of December. They did not go down as far as a fully invested, passive portfolio in December, so they recovered faster in January, even though stock markets did not get all the way back to neutral. 

When our portfolios go lower with the next tests of buying support, we will have buying power. When they get more fully invested with lower priced assets, the recovery will be significantly quicker than the passive portfolio. So we will earn our fees (which passive advisors will just sit back and collect).

This is the value that we add. Part passive (what remains invested), part active (what is now cash equivalent). Earning our fees. In the long-term this will put our portfolios ahead of the completely passive portfolios, if you value our experience and expertise (and our Wealth Forecasting, inclusive in our fees, but with a value of between $2,000 - $3,500 which a fee for service financial planner would charge).

The point being, that, if you have a passive portfolio, why are you paying for it?