Portfolio Shock Absorbers

The main objective of long-term portfolio strategy for our High Rock Private Clients is capital preservation and portfolio growth to meet long-term goals. These may evolve over 20 to 40 year time frames (see yesterdays blog: scotts-blog/another-client-ready-to-retire-or-re-wire-ahead-of-schedule)  which will cover a number of economic and market cycles. Our challenge is to manage the risk inherent in these cycles to maximize the opportunities and mitigate, as best as is possible the downside impact.

Day to day market swings and volatility over these long periods matter only in so far as it impacts the recovery period and slows the long-term ability for growth.

Nonetheless, we closely monitor our client portfolios to see how they respond to market shocks in an ongoing effort to understand how they impact our portfolio risk management.

Yesterdays market activity certainly had some interesting price activity:

The S&P 500 shed 3.35% (which dropped it back to a little under flat on the year). Our risk measure, a full standard deviation (from the mean) move, is about 11% for this index. In the last quarter of 2018, if you recall, this index dropped about 1 1/2 standard deviations.

On a more global scale, the benchmark that we use to compare to our Global Equity Model performance, the All Country World Index (ACWI) ETF fell by about 3.5%. That brings it to a -2% for 2020 thus far.

Higher risk (less diversified) assets like those in our Tactical Model (Canadian small and mid-size company bonds and stocks) have a much smaller correlation to the broader equity markets, but for the most part, they, at this juncture, appear to have fared better. The TSX was down only about 1.5% yesterday. For 2020, the TSX is up by almost 3%.

On an interesting note, Paul's portfolio (High Rock founder and portfolio manager) who has the largest allocation to the Tactical Model (and less to Global Equity, more to Fixed Income), was lower by 0.3% yesterday and is higher by 2.8% year to date.

We all (at High Rock) have the same assets, our allocations of those assets are a function of our individually tailored portfolios and our goals as identified in our Wealth Forecasts.

My portfolio, a somewhat more mainstream balanced allocation (derivation of "60/40"):

Dipped yesterday by 0.8%. 2020 so far is about +0.8%. This matches many of our 60/40-type balanced (and fully invested) portfolio client performances.

Our Benchmark for the Canadian bond index is the XBB ETF.

Yesterday it was higher (with lower bond yields) as investors moved to safer assets by about 0.25%. On the year so far though, XBB is up by 3.4%.

Needless to say, our clients who have a larger weight in our Fixed Income Model (more conservative allocation) fared relatively well yesterday, down between 0.25 and 0.35%. Year to date, they are higher by 1-1.3%, on average (helping Paul's portfolio too).

Preferred Shares, an asset class that we are not so comfortable with, especially if they are rate reset preferred's (my portfolio only has about a 3% allocation to preferred shares), did not provide any shock absorbtion yesterday. In fact the ETF CPD was down 1% and the other ETF, DXP was down  about 2%.

I should also add that our portfolios have exposure to $US that helps mitigate the downside on days like yesterday when there is a move to the safety of the $US, although at year end 2019 this position worked against our  2019 portfolio performance.

Of course, it is only one day, and our true focus is on the long-term, however, we do need to constantly monitor and be aware of what these shocks do to our portfolios to properly prepare them for when the bigger, longer lasting and more destabilizing ones (larger standard deviation moves) occur.