Still Plenty To Give Thanks For

 One of my favourite holidays from when we resided in New York was Thanksgiving (we call it U.S. Thanksgiving because we still celebrate both the Canadian and U.S. holidays), there was always such a good feeling that surrounded it, the air was crisp and cool and there seemed to be a spirit of goodwill in the air: it started with the evening before which usually involved a skate at Wolman rink in central park:

And the blowing up of the floats that begin later in the evening in preparation for the Macy's parade and took most of the night on W81st street where we were the guests of the Excelsior Hotel for the night (our home at the time was on the north shore of Long Island, Baxter House, Port Washington). A few seconds walk to my aunt, uncle and cousins' place at the corner of W81st and Central Park West, across from the Museum of Natural History, where there was always a Thanksgiving Eve party or get together that followed our Wolman skate.

We (my daughters were 4, 6 and 8 for our first parade in 1993) were early to rise in the morning and the excitement was palpable as we wandered, pre-parade, about the newly inflated characters (usually, as I recall, Spiderman and Clifford, the Big Red Dog, among others) just outside the hotel door. The kids were in awe, which added to the spirit of it all. Fantastic memories:

We won't be in NYC this year, as we were last year. As with a lot of our annual traditions, this one has been put on hold (who knows what lies in store for us at Christmas time), however, apparently, the parade will go on for TV viewers, but in a different format (but still in NYC) thanks to Covid-19. Out of nostalgia, I will be tuning in.

Despite all the upheaval brought on by the coronavirus pandemic, there is plenty to give thanks for: what looked like an economic and stock market meltdown back in March has turned itself around considerably thanks to government and central bank policy stimulus, followed by what may possibly be some political directional change and vaccines that, at the moment, look to have a pretty high level of efficacy.

Yesterday, a pair of our younger clients put an offer in on their first home and needed some cash, so we were busy locking in what looks like a fine return (after fees) year to date, in a pretty balanced mandate (a little more aggressive for them, given their time horizon of 40 or so years to retirement). Nonetheless, back in March, I don't think many of us would have seen that happening.

This pandemic is far from over and it is possible and even more likely that the realities of job losses for many are going to catch up with the economy before the vaccines are able to allow for a better future, but there is certainly some encouragement for that future.

Stocks hit record highs on the back of this encouragement (and I love selling into record highs and taking profits), but as I mentioned last week, valuations are stretched and the "fear and greed" index is suggesting that we are looking at "extreme" greed at the moment. Usually this is followed by some effort by stock markets to correct and buying opportunities will abound when that happens. 

So we can be thankful, but we should not be complacent. 

As well, remember that past performance is not a guarantee of future returns and while, at High Rock, we work darn hard to get the best possible risk-adjusted returns for our clients, many clients may have different goals, objectives, risk tolerance and time horizon's and all of this goes into the building of a tailored and personalized investment strategy.

"The Future's So Bright, I Gotta Wear Shades"

(with apologies to Timbuk 3 and their 1986, one hit wonder, single !) 

Anybody remember what happened in 1987?

Here is what Investopedia has to say about the October 17, "Black Monday" stock market crash: "The stock market and economy were diverging for the first time in the bull market, and as a result, valuations climbed to excessive levels..."

Stock markets have rejoiced at the recent results of the Pfizer and Moderna vaccine trials and yet again stock market participants have taken their bullish outlook to new extremes: new highs and wildly stretched valuations. Don't get me wrong, I love seeing client portfolios rising in value and I am certain that clients love to see it too, however we know what happens when the majority are bullish and have all bought in (all the good news is priced into the market). New buyers start to be few and far between because most of the money chasing prices higher has been spent: those portfolios become vulnerable to a correction as profit-taking enters the market. Just be prepared (emotionally) for the days when portfolio values start to slide lower.

As our friend and critical thinking strategist David Rosenberg suggested in his morning comment today:

"The new mantra is that November is proving to be the best month the stock market has seen since October 1987! Just a warning because the last time we heard the cheerleaders saying this was back in January of 2018... You would never have guessed that from the end of January 2018 to the end of that year, the S&P 500 was down 11% (and tax cuts were the "game changer" like vaccine treatments are today)."

"My advice is to expect the unexpected"... (where have we heard that line before? See my December 29, 2019 blog)"... and fade the consensus at all times when it becomes a herd mentality in either direction".

My friends, while the vaccines may begin being distributed in the next few months, Covid cases are escalating and the political deadlock to our south is bordering on dangerous.

Clearly there is a good reason to be optimistic on the potential for economic growth for the long-term, but we think that it is prudent to temper short-term expectations:

I study nuclear science
I love my classes
I got a crazy teacher, he wears dark glasses
Things are going great, and they're only getting better
I'm doing all right, getting good grades
The future's so bright, I gotta wear shades

 While We Were  Focusing On This...

This was happening: (record daily increases in Covid -19 cases)

and...

As well, we got a look at important Q4 data on the employment / unemployment front:

In the U.S., the Labor Department reported (yesterday) that employers added 638,000 jobs in October and the unemployment rate improved to 6.9%. However, there remains over 10 million jobs lost from pre-pandemic levels:

In Canada, Statistics Canada reported (yesterday) that there were 83,600 new jobs added in October and the unemployment rate fell to 8.9%. There were 635,000 fewer jobs than pre-pandemic levels:

Clearly, employment gains are slowing.

And behind the headlines, in Canada, long-term unemployment (looking for work for over 27 weeks) is accelerating:

Statistics Canada reported that it "increased by 79,000 (+36.2%) in September and a further 151,000 (+50.7%) in October... As of October, the long-term unemployed totaled 448,000, or one-quarter (24.6%) of all unemployed people."

"September and October increases in long-term unemployment are by far the sharpest recorded since comparable data became available in 1976".

With increasing Covid-19 cases and the potential for further lockdown and / or simply seeing consumers staying away from and /or postponing economic activity and employment growth stalling, the longer-term outlook becomes more uncertain.

If, as and when the de-coupled stock markets start to wake up to an economy that has a significantly longer time frame for recovery (and the likely not-so-positive impact on corporate earnings) and add in a U.S. political situation that may be more complex with a likely Democratic President and a Republican Senate (uncertain fiscal stimulus), then I would suspect that would leave stock prices vulnerable to the downside. 

Based on this, with current stock price valuations at expensive levels, the risk to the downside for stock prices is once again heightened. Patience will be required. Volatility will bring opportunity and we believe that more volatility is coming.

What Is Keeping The Bank Of Canada Up At Night?

"Canadian and global economic activity remains unusually uncertain" from the October 2020 Monetary Policy Report.

Yes, we have recovered some of the lost growth that we were experiencing pre-pandemic, but as you can see in the above chart, it is not expected to return to pre-pandemic levels until mid 2021 in the best case scenario.

And here is what the BOC has to say about the risks to that:

"Given the continued uncertainty about the evolution of the pandemic, the projection is highly conditional on the following assumptions:

• Extensive lockdown measures, such as the widespread closures imposed early in the pandemic, will not be reintroduced, although more localized and moderate containment measures will ebb and flow.
• Vaccines and effective treatments will be widely available by mid 2022, at which time the direct effects of the pandemic on economic activity will have ended.

Precautionary behaviour of households and the effects from the uncertainty surrounding COVID-19 are, however, likely to linger.

The pandemic is also likely to have persistent effects on the behaviour of consumers and businesses. This could lead to lasting changes in the structure of the economy and could weigh on its potential output."

As I have stated so very many time in past blogs (ad nauseum), economic activity is a function of confidence by consumers and businesses. Uncertainty is going to be a major hurdle.

The outlook for the global economy is also somewhat hazy:

and apparently not expected to get back to pre-pandemic levels as far as their forecasts go out (at this moment).

This morning the U.S. Commerce Department reported a record Q3 GDP growth rate of 7.4% (33.1% annualized) , slightly better than expected, however, still running at levels well below where it was in Q4 2019:

So, my friends, lets keep some perspective: lets hope that the BOC's optimistic forecast is correct, but let's be prepared for this to drag on longer than we might wish.

One thing we can count on is low interest rates for an extended period: the BOC release on interest rates yesterday stated "well into 2023". They are also buying longer dated bonds, mostly direct from the federal government, which should keep longer term rates in check.

If you think that low interest rates in bond markets compels you to want to own more over-priced stocks, give it some thought.

Here is what our friend David Rosenberg had to say recently in one of his morning letters:

"You don't own Treasuries (government bonds) for the yield, obviously. You no longer have a whole lot of potential for capital gains, either. That's not why you own them. You own them because they have no capital risk. They have no default risk. they may obviously have inflation risk. But there is no other investment where there is no default risk and perfect certainty of what your payment will be at the time of maturity. You don't own bonds to propel your total return; you own bonds to preserve and safeguard returns and use them as a risk-management tool. That I see so many knuckleheads talk about how 60-40 doesn't work anymore is a true mystery...

Equities are sexier after all. Nobody talks about the Treasury Market at cocktail parties."

The economy, the state of the consumer (household) and business confidence will keep the Bank of Canada up at night. Clearly there is risk in the "unusual" uncertainty. Now, more than ever it is time to take stalk of the risk in your investment portfolio and how best to manage and mitigate that risk.

 What Keeps Us Up At Night

We like to think that we are professional "worriers": we worry about stuff so that our clients don't have to, so that they can go about leading and enjoying productive (our leisurely), positive lives.

That is what comes from our on-going assessment,  mitigation and monitoring of risks to our long-term wealth forecasts and our investment portfolios. We want to be optimistic, but only cautiously so. Over-optimism is clearly an emotion that only increases risk. However, optimism, especially in financial markets, is what is sold to less suspecting buyers, so we have to always be on guard for that (beware the advisor with the latest and greatest!).

So what are we worried about?

1) The economic impact from the Covid 19 is far from certain and the Q3 bounce-back from the huge dive in Q2 GDP growth will stall out in Q4 and onward.

The Bank of Canada's Business Outlook Survey - Autumn 2020 and Canadian Survey Of consumer Expectations - Third Quarter of 2020 , released earlier this week, clearly outline high levels of economic uncertainty for the future.

The U.S. Federal Reserve's Beige Book (reports by the various regional Federal Reserve Banks) released yesterday, suggests a similar level of uncertainty, including the potential impact of the upcoming November 3 presidential election:

Which, according to the electoral college polls (which matter most vs. the popular vote), remains unclear with enough "toss up" states that make it too close to call.

2) We fear a disputed U.S. election result and the potential for civil unrest that this might create.

3) Surprise, surprise! We think that stock market valuations are expensive and as a result there is a greater risk to the downside, if , as and when investors become disappointed with the current economic or political outlook.

The last time we saw the price to earnings ratios at these levels was way back in the "dot-com Bubble" of 2001-02. Currently stock prices are very "bubblicious". When stock prices rise and portfolio valuations move higher, some might feel better. We do not. We become even more concerned, especially when we feel it is not warranted.

Sell greed, buy fear.

4) Government debt loads are soaring and will continue to do so and at some point in time additional revenues will be required just to cover the expanding interest costs. Taxes are not going down and tax breaks for the wealthy (if you have an investment portfolio my friends, or own a home, for that matter, consider yourself in the "land of the wealthy") will come under greater scrutiny (capital gains taxes for one!).

Sleep well my friends (we have your backs)!

 Mitigating Risk (Part 5)

Guest Blog courtesy of Ross Brown (Acorn To Oak Financial)

Insurance to many people is a confusing and often highly misunderstood topic. Most of us have been taught to think of it as a cost or a necessary evil. Many families have not been counselled on how to utilize it effectively as an integral part of Risk Management within their overall wealth building process.

Over the years we have seen many financial plans that were created from an accumulation and retirement planning philosophy, but in reality, few are created with true Risk Management in mind. Too often these well intended plans are created with static assumptions that look fantastic if everything goes according to plan but fail miserably when adversity rears its ugly head.

We need to think more like an engineer when we build our financial lives: that our plan should work equally in both good times and in bad. When an engineer builds a bridge, they do not just build it based on the bare minimum requirements, they build in many contingencies that could impact the integrity of the structure such as excess winds, additional load, earthquakes etc. Our financial lives should be no different and insurance can play an important role in this.

Let us start by looking at what types of risks could potentially exist for you and your family throughout your lives and how they could derail or significantly impede your future financial success.

In the first category there are events that we would classify as Economic Risks such as Job Losses, Inflation, Stock Markets, Interest Rates, Recessions, Pandemics, Tax Rates and Tax Laws. These are events that you usually have no control over as an individual and the best way to protect yourself from them is by having access to liquidity for both emergencies and opportunities as the situations arise.

In the second category there are events that we classify as Insurable Risks such as Lawsuits, ID Theft, Disability, Death, Property Damage or Loss, Health & Long-Term Care Costs. These are events that you are in control of mitigating the risk in advance by securing insurance so that you and your family are protected should any of these events occur.

Insurance is one of the most important financial instruments available today in society. It gives us the ability to transfer certain risks away from ourselves into a pool of many who agree to assist in the loss of any individual member within that pool if a certain peril should occur. Insurance is something we all want to own as it provides us with security and certainty. 

So, what is Insurance? Well if you always keep this one definition in mind, you will have a much stronger and resilient insurance portfolio:

Insurance is the reimbursement for the FULL VALUE of any item lost.

We should all use insurance effectively to protect our wealth, income, and lives by looking at the “economic value” of them and then matching that value to the proper level of insurance.

Let us give you a few examples.

·         If your home burned down in a fire, would you want the insurance company to pay you the full value of the home or just enough to build a smaller home to “meet your needs”?

·         If your car were stolen, would you want the full value of the car to be replaced or would you want just enough money to buy a smaller less expensive car that “meets your needs”?

·         If you became disabled and could not work, would you want your full income replaced or just a lesser amount based on what “you need to get by”?

·         If you were to die prematurely, would you want your family to receive your full annual income, as if you were alive, or would you want them to receive just what they “need to get by” and not a penny more?

We hope your answer to each of these questions was that you would want the full replacement value, and not a lesser amount that represents a perceived “need”. The most important point that we can try to get across is that when we purchase insurance, we are buying a way of life that WILL occur if one of those perils should happen.

Often we see people with substantially less coverage than full replacement value and when asked why some of the answers we get are, “that was all I wanted to spend” or “I have no idea but it sounded good at the time” or “I don’t like insurance and I am trying to save money on the premiums”. But when asked how much they would own if it were free most people would own the maximum they could acquire.

The focus on an insurance buying decision should not be on premium cost but should always be on obtaining full-replacement value coverage first.

Many times, the decision has been made by seeking out the cheapest policy (which often provides the fewest benefits, and hence the least value), we should seek to insure for the full value of the asset, income or life we are trying to protect. When discussing any form of insurance, first imagine the peril occurring in your life, then select the coverage that will make your life happy or complete if the event should actually occur.

Once that amount has been ascertained, then the cost and how to pay for it comes into play. But never settle for less than what you would want to have if the peril did occur.

Born in Edinburgh, Scotland Ross moved to Canada in 1996 and has over 20 years of experience in the financial services and insurance industry.

His expertise focuses on the efficient and effective accumulation and distribution of wealth using insurance products. He specializes in assisting families, professionals and business owners with solutions designed to protect, as well as enhance their income and wealth throughout all stages of their lives, while ultimately passing it on as efficiently as they’d prefer to their families, charities or religious affiliations.

Working regularly with other professional advisors he brings integrated and strategic insurance solutions to meet a client’s unique circumstances, complementing the excellent work delivered in the Wealth Management, Investment, Legal and Accounting sectors of our industry. 

He is actively involved in volunteering his time to the Barrie Scotch Whisky Society and has also served as a Simcoe County board member for the Canadian Association of Insurance and Financial Advisors.  

 Mitigating Risk (Part 4)

I have been looking after this particular family since I began my second career (first career was as a trader / risk manager of fixed income securities as a VP at a few financial institutions in both Toronto and NYC) in the world of family wealth management in and around the turn of this century. As you can see in the above graph, they are well on their way to achieving their goals. They also have a $500,000 whole life policy that currently has a death benefit of close to $800,000 that will continue to grow and go to their beneficiaries tax free. They can also borrow against it, if they so choose, to be repaid upon death and this is also going to be able to provide tax-free cash flow, if they so desire it. Great diversification, tax efficient and it provides plenty of options and safeguards.

But we have also been able to achieve some solid, risk-adjusted returns by which to grow their savings:

Most of you have seen this table and graph before (and our clients will see it regularly updated in their quarterly reports). 

What we are focused on (upper table) is the absolute return: Compound Annual Total Return (after fees) and the Return per Unit of Risk taken, relative to the other benchmarks. 

We have eight years of history with this client because previous institutions who provided the platform for my wealth management practice considered my clients as theirs and would not release the their data to me under the guise of a privacy policy. Another story for another day, perhaps, but be well advised that this is the proprietary nature of large financial institutions.

However, eight years (with two of them having mild negative returns: 2015, 2018) should be ample to show how this strategy of mitigating risk (return per unit of risk taken) has allowed a 60% equity / 40% fixed income portfolio to more than out-perform our relatively conservative 4.5%, after fees, target growth projections. 

It works! 

Patience is often required. Some, over the years, have lost patience and opted to find a different strategy, usually on a "do it yourself" (DIY) type basis. Others have seen the light and joined the many (now High Rock) clients who believe in making a plan and sticking to it, with a view to the long-term. We can't control the markets, but we can control our level of exposure to them and the structure of our portfolios to contain and utilize volatility as it occurs. This my friends is called stewardship. Taking the long-term view to building and having wealth that takes you to your end financial (and life) goals and avoiding the noise (and their is so much noise right now) and the "shiny objects" (things that might make you want to gamble your financial livelihood) that other, rather overly optimistic folks, want to sell you.

We are long-term optimistic folks here at High Rock, but cautiously so. Our experience at managing risk has few equals and we know that one way to keep our clients sticking to their plans is to not let them be frightened out of them.

Balance, diversity and opportunity, if you wait patiently for it, are the keys to mitigating portfolio risk. The proof is in the above charts and tables.

That being said, and many optimists won't let you in on this: past performance is not a guarantee of future returns. However, as many of you already know, at High Rock we work darn hard to get our clients (and ourselves) the best possible risk-adjusted returns.

Happy Thanksgiving!

Stay safe, stay healthy!

 Mitigating Risk (Part 3)

In parts 1 and 2 we identified and analyzed a number of risks associated with achieving our long-term goals that pertain mostly to reaching some form of financial freedom.

Risks associated with income generation (employment or other forms of incoming revenue related to daily work) and as a  corollary, any savings after lifestyle expenses are covered, can be mitigated by various forms of insurance. We shall save this for a future blog, where we can draw on the expertise of a trusted professional or two. 

Suffice it to say that I have witnessed the success of some whole life insurance policies issued many years ago that are, today, looking very strong in the diversification of assets and reduction of taxes categories (retirement and estate planning). Never considered "cheap", but always worth considering in a long-term plan, especially when you are young and healthy (because you won't always be so and insurance gets significantly costlier as you age).

In order to grow our money (savings) beyond regular contributions after lifestyle costs, we are going to need annual returns better than the annual increases in those costs (inflation).

That puts all the pressure on our investment portfolios. So lets look a little closer at how we assess (evaluate) the risk in our investment portfolios:

Each security we own has a history of price movement. Larger moves in the price of that security, over time, can be measured to allow us to understand the role that the specific security will play as a function of the total portfolio given a certain amount of price appreciation or depreciation.

The measurement of price movement is referred to as the standard deviation away from its mean (average). So that a more volatile (historically) investment (asset / security / stock / bond) will have a greater standard deviation:

We can look at each of the individual components (the grey dots) of the portfolio, determine their standard deviation and equate that to the combined total portfolio (red dot), to tell us what we might anticipate would be a likely scenario (% movement) for a significant negative (or positive) event. 

This helps us to mitigate the downside risk to our portfolios: we know each of our clients exposure to risk and the potential fall in value should a major event occur. Last March was a significant event whereby the S&P 500 (for example) moved about 3 standard deviations (approx. 35%) lower over a very short period of time. In contrast, our balanced and diversified  60% equity / 40% fixed income client portfolios slipped by about 8% (depending on the composition of the portfolio) and the 40% equity / 60% fixed income client portfolios slipped by about 4%.

That is, my friends, by design. The less the portfolio goes down following a significant sell-off, the quicker the recovery and the sooner it gets back to growth mode and onward towards the average annual returns necessary to build toward long-term goals.

The evaluation of these downside risks allows us to ensure that we can create a combined portfolio best suited to mitigate them.

And as we always and transparently will offer up: historical returns are not a guarantee of future growth, but at High Rock we work darn hard (behind the scenes) to make sure that we get our clients the best possible risk adjusted returns. 

If your advisor cannot tell you what your risk profile is, they are not doing their job.

 Mitigating Risk (Part 2)

In Part 1 we identified 7 risks to achieving your financial goals. 

In Part 2,  let's analyze these risks:

1) Not having a steady stream of personal income. 

Whether we work for ourselves (highly recommended, but comes with perhaps more potential risks) or for someone else, establishing a stream of income is, especially in our early post-education days, vital to enabling us to start building our future wealth. Not having income will definitely delay our arrival at our goals because it, obviously, means it will hurt our ability to save.

2) Not generating any savings.

Pictures, they say, are worth a thousand words (below), but if you can begin early enough, the powers of compounding are going to be the "magic bean" that allows you to multiply and accelerate the growth of your wealth. Perhaps see my June 24 blog "New Financial Literacy Curriculum" specifically, Lesson 3: compounding.

But you definitely don't want to miss out on this opportunity to grow your savings and wealth:

The growth chart above is based on a rate of an annual average growth rate of 5.5% before fees, taxes and inflation and regular contributions of savings. Which means that your income has to be able to cover your cost of living and have some leftover for saving.

Which leads us into the next risk factor:

3) Not getting growth from your savings beyond the annual increase in your cost of living:

As I suggested in Part 1, bank or other financial institution GIC's and savings accounts are just not going to cut it. When our central banking institutions (The U.S. Federal Reserve, Bank of Canada, etc.) tell us that interest rates are going to remain at or close to zero until 2023, don't be expecting to get a whole lot more out of any financial institution who wants to use your money to lend to others (and make the spread for their shareholders) at somewhere between 2-5%. 

In other words, you will have to find ways of growing your money that will require greater levels of risk. A 90 day Government of Canada treasury bill is "risk free" (as a short-term obligation of the Canadian Government). Currently it pays about 0.15% before fees and taxes. Anything that pays more is going to have some level of risk attached to it. No wonder investors are jumping into the stock market with very little idea of how much risk they are actually exposing themselves to.

Therefore... Risk #4

4) Investment asset price depreciation.

Stock prices as a broad asset classification, over long periods of time, generally go up.

 U.S. Equity (S&P 500 stocks) have returned price appreciation of 128% since 2000, or an annual average of 6.4%. Add the average annual dividend yield over this time period and the total return has been around 7.6% annually.

But they can fluctuate wildly at times. Most of us were watching what happened in March of this year. When you see that kind of volatility, it can be rather disturbing.

However, the central banks have figured out how to entice us back in by making "safer" alternatives so unattractive that some believe that there is little other alternative (at the current time) than to be invested in stocks, driving stock prices to somewhat extreme levels.

However, with little or no economic growth expected until 2023 (from current levels) and corporate earnings likely to offer little growth, what is the true value for stocks? A very important question for investors. If they are overvalued at current levels, then there is the possibility of price devaluation in front of us. For some (with shorter time horizons for reaching their goals) that may be daunting and carry too much risk. So it ultimately becomes a function of  what your specific goals are and the time allotted for achieving them.

For those who need steady cash flow into their investment portfolios, there is risk there too.

5) Investment asset income interruption

Lower interest rates for longer periods of time will mean that safer methods of deriving cash flow for investment portfolios are going to be affected. Investors who need "yield" will have to look at other, potentially higher risk alternatives. In the bond market, the safest bonds, issued by the Canadian or U.S governments yield between 0.55% to 0.70% for 10 years. Investment grade corporate bonds (like banks, insurance and telecom companies) are 1.5% to 2%. It may require some further venturing into the higher yield, higher risk bond world. Preferred shares, with higher dividend payouts have been exceptionally volatile through this time. 

6) The costs associated with investing.

Fees, commissions, MER's (Mutual Fund Management Expenses) can all eat away at your long-term portfolio growth (eroding the magic of compounding effect) and make it more difficult to get to your end goals:

7) Taxation 

Taxes, in our lifetime and likely for generations to come are not going down following the staggering debts and deficits that have been created in response to the Covid pandemic. In fact, expect governments to try to find ways of further taxing the wealthy (non-registered assets and capital gains). We have to be prepared to face this risk in the accumulation of wealth.

So what do we do about all of this risk?

Stay tuned...

Mitigating Risk (Part 1)

 We all have goals. Take a minute to think about what your goals are. Usually, they are likely to be centred around what kind of lifestyle you want to have for you and your family over a certain period of time: your lifetime, at least, and perhaps the lifetimes of your children and grandchildren.

In order to make many of those goals happen, we are going to need some sort of financial freedom, where we are no longer dependent on someone else to provide us with our livelihood (i.e. an employer).

The standard way of getting to that financial freedom point is to build wealth. Save, invest, minimize the taxes that you have to pay and grow your wealth. Sounds so simple, right? Perhaps not so much when you throw all the uncertainties into the mix.

It is the uncertainties that create risk. 

What is at risk, in the end, is whether or not we will be able to achieve our goals. 

If we save our money for our future needs (goals) and stick it in a GIC at 1% (before taxes and costs eat up anywhere from 1/4 to 1/2 of the interest) and the annual increase in our cost of living is 2-2.5%, then the value of our savings, over time, will be eroding at an annual rate of somewhere between 1-2%. Friends that is not what your local bank advisor might call "safe": your future purchasing power eroding and your goals fading.

OK, point made, we need to find alternative ways to get growth in our money. So we turn to the world of investing to find assets that will help us get growth, better than that which is available in a "safe" bank GIC.

Just how do we do that? We either buy assets that have growth potential (for capital appreciation), we buy assets that will pay us income, or we put together a portfolio with a combination of both.

That brings another layer of risk: we are going to be now dependent on 1) prices for some of the assets that we have purchased going up 2) that the income that some produce to be continuous and as tax efficient as possible. Remember that interest income is taxable at your marginal rate. Dividend income is taxed more favourably (at close to half of your marginal rate) as are capital gains (at the moment).  Want to know more about your marginal tax rate... go here: https://www.canada.ca/en/revenue-agency/services/tax/individuals/frequently-asked-questions-individuals/canadian-income-tax-rates-individuals-current-previous-years.html

So we have identified a number of risks that may impact your ability to reach your goals:

1) not having a steady stream of personal income

2) not generating any savings

3) not getting growth from your savings beyond the annual increase in your cost of living

4) investment asset price depreciation

5) investment asset income interruption

6) the costs associated with investing

7) taxation

At High Rock, we manage risk first, so it is important to understand all the risks well, before setting out on a path to create a strategy to get you to your goals: with economic growth low or non-existent (and unemployment high),  it is paramount now, more than ever to manage those risks properly.

Our new clients are coming to us because they are frustrated with a one size fits all investment strategy. They are concerned that they don't have a tailored wealth management solution, are tired of overpaying and worried about their current advisor's conflicts of interest.

More to come...

 Confidence

I have written often about the key to economic growth being tied to consumer and business confidence: confidence leads growth (as in the chart above). While we have certainly bounced from the lows in both consumer confidence and economic growth following the pandemic lock-down, we are not going to see the same magnitude of bounce in the near future as Covid / Coronavirus uncertainty remains high. Our desires to get back to a closer to normal life (immediate gratification) may have to be tempered as well.

Angus Reid Institute released a Sept. 8 report titled Economic Outlook: Covid-19 stalls trend of growing financial optimism in Canada. I might suggest having a look, as it paints a more realistic picture than the one currently being painted by stock markets (which, as I suggested in my Aug. 31 blog, are in bubble territory).

In a nutshell, Canadians are underwhelmed by what they expect the future will bring:

The main story is employment recovery, which tracks very closely to consumer confidence (and that does not require any significant amount of imagination to understand): unemployed consumers, or even those who might be concerned about their employment in the future are not going to be spending much other than on their basic survival:

Something to keep in mind because Apple, Amazon, Microsoft, Facebook and Alphabet (Google) require consumers to be spending to support their businesses (and earnings) and it is the buying of those 5 stocks that has been driving markets higher (since the lows in March). Until now, government payments supporting unemployed workers has muted the long-term impact on economies, but that will not last forever and eventually, as we might say, the "rubber will meet the road".

We should also be wary of financial and other lending institutions where there have been deferred payments on loans and mortgages. When deferments cease, the repercussions on the unemployed could be disastrous for those companies.

Are people going back to their office towers? To the malls? Sporting events? Concerts? Vacations and cruises? Not likely in the near term and for many, only if the current virus is eliminated. That will take time (if it is possible to do so) and in the interim our impatience with waiting for it to happen will grow.

I know it is not easy to be patient in the current times of fast information flow and the need to be constantly visiting our devices for the latest updates and opinions, but unfortunately patience and a sense of caution will be part of the new normal, especially when we have limited places to go for our distractions. Best we all settle in for the long haul: focus on our long-term goals and keep some safe cash (or equivalent) on hand for opportunities if and when they develop.

 What Is An Investor To Do?

While I have stepped back from my blogs for most of August, I have still had the opportunity to have some excellent conversations with clients, prospective clients and non-clients who just want to understand financial markets (and what to do about them, if anything). The U.S. Federal Reserve (along with other global central banks) has, or at least is in the process of creating an asset price bubble as money continues to remain cheap and liquidity is sloshing around the global financial system. Could the bubble continue, certainly. As my good friend Dennis Gartman always reminded us in his daily market letter (which he retired from writing at the end of last year, see my final blog of 2019 Expect The Unexpected (Again)): of the Keynesian quote that "markets can remain irrational far longer than you and I can remain solvent". Stock prices (and home prices, for that matter) will continue going higher until they stop doing so. Whether it is the fear of missing out (FOMO) or that there is no alternative (TINA) which is driving the buyer emotions.

5 stocks are driving the S&P 500: 

And that has pushed the S&P 500 to new highs:

and a year to date price jump of 7.68% in the middle of a pandemic induced recession that could well last past 2022. Think 2030 perhaps? Unemployment is going to remain stubbornly high for a long time to come. The repercussions from that alone will be significant. Seems to be that it is not getting stock and house buyers down, however.

Just in case you were wondering how expensive stocks are:

So if you are feeling the pressure to jump into the feeding frenzy, my advice to you is to be patient. From the Fear and Greed index chart, over time, opportunity will once again present itself as it has in the past (March was a good opportunity), there were a couple of them in 2018 as well. Certainly, the moment is not now. If you have new cash on hand, park it for the time being.

Paul (who manages High Rock's Tactical Model) picked up the Sprott Physical Gold and Silver Trust (CEF) fund in late March / Early April, turned out to be an excellent addition. But this is not a recommendation to go out and make that fund purchase without first checking in with your advice giver on whether it may be appropriate for you. Point being, opportunities will return. Wait for them.

Our good friend David Rosenberg suggested in today's Early Morning With Dave that these are the assumptions that have been priced in to the financial markets (i.e. they are reflected in current pricing):

• That the policy stimulus will continue well into the recovery phase
• That there will be no economic relapse ahead
• That we are months away from a vaccine being developed
• That the erosion in U.S. - China relations is mere noise and more progress is coming on the trade front
• That Trump will end up winning the election on November 3rd.
• That the Fed will finally be successful at generating inflation.

 If you have not received an evite to High Rock Private Client's (belated and postponed) 5 year anniversary (now a) Zoom meeting featuring David Rosenberg as our guest speaker and wish to attend, let us know.