Things That We Just Have To Shake Our Head At:
Today I was "out-blogged" by my High Rock business partner:
So I send you the link as suggested reading!
Enjoy!
Thursday, September 15, 2016
Wednesday, September 14, 2016
More On The Stuff That Nobody Really Wants To Think About
We all want to have a happy, healthy and somewhat stress-free retirement. However, as I suggested in Monday's blog, there are risks that we have to mitigate (as best as we possibly can) in order to accomplish this.
We have to know and understand these risks.
Sadly and unfortunately we are not educated in these risks at an early age (financial literacy should be a core subject from the 1st through to the 12th grade). I actually looked into the curriculum for Ontario and this is what I found:
Is financial literacy offered to students as a separate course?
No. Financial literacy education is integrated in the existing Ontario curriculum.
How is financial literacy taught in Ontario schools?
Financial literacy is part of the elementary and secondary curriculum in many different subjects such as mathematics, social studies, Canadian and World studies, business studies and many others. In some subjects, students may be learning specific skills such as understanding money, consumer awareness, personal finances, budgeting and money management that will help them develop financial literacy skills. In other subjects, financial literacy connections may be made as students learn about their place in the world, as a responsible and compassionate citizen or when they study different economic systems.
Through the curriculum, students are developing skills in critical thinking, decision-making and problem solving that can be applied to subjects at school and to real life situations. Resources have been developed for teachers to help them connect financial literacy topics across the curriculum to deepen students' learning and make financial literacy more relevant.
So, depending on the teacher: "financial literacy connections may be made as students learn about their place in the world".
Good luck with that.
Teachers get a pretty favourable Defined Benefit Pension Plan that will ultimately take a good deal of the risk out of their achieving a successful retirement, so are they the best at educating our youth about financial risk (if it is not structurally built into the curriculum)?
The media try to help, but their target market is the already under-educated (in financial literacy topics) adult and a good deal of their motivation (other than selling their product) comes from trying to protect the under-educated masses from the predatory financial services industry.
We may all have some particular respect for Canadian Banks (because they were able to survive, mostly unscathed, through the financial crisis of 2008), but beneath the surface my friends, they are focused on their profitability and that makes them more interested in acquiring assets, collecting fees and minimizing costs that may run counter to the desire for their clients to pay lower fees and get better service.
So do we want to be turning to Canadian Banks and their affiliate investment advice channels for financial education? I would suggest that, in and of itself, poses a conflict of interest.
The Bank Of Canada is a more neutral player in our current state of affairs, non-political (for the most part) and with the Canadian economy and the Canadian people and their best interests at heart.
I know, parents (and caring teachers), that getting school age children to read the speeches of Bank of Canada staffers is probably going to be like pulling teeth. However, it is important stuff (as I said in the title) that we, for the most part, really don't want to think about.
But I think we should all take a moment to read what Carolyn Wilkins had to say in her speech today:
Canadian households need to play their part in ratcheting down their growth expectations and reigning in their exposure to financial risk because the returns are just not going to be there.
Paul (my business partner at High Rock) and I shake our heads at so many things that Canadian investors leave themselves vulnerable to (because they just don't know any better):
1) They pay too much in fees and costs for what they receive in return. Over-charged and under-served.
2) They are easily sold on investment advice that may be out-dated or just plain wrong (because the advice channel is built to pay the advisor quite handsomely and the bank / insurance company shareholder as well).
3) They really do not have a good understanding of risk and risk-adjusted returns (if they did why are they vulnerable to such wild portfolio swings?).
4) They, in many cases, do not have a detailed financial plan, that sets out the risk parameters, time horizons, cash flows and goals for their retirement.
A rainbow is not located at a specific distance from the observer, but comes from an optical illusion caused by any water droplets viewed from a certain angle relative to a light source. Thus, a rainbow is not an object and cannot be physically approached. Indeed, it is impossible for an observer to see a rainbow from water droplets at any angle other than the customary one of 42 degrees from the direction opposite the light source. Even if an observer sees another observer who seems "under" or "at the end of" a rainbow, the second observer will see a different rainbow—farther off—at the same angle as seen by the first observer. Wikipedia
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Monday, September 12, 2016
What The "True Risk's" Are
Last Thursday Catherine Murray (BNN Business Day PM) said to me, that there "were a lot of opinions out there of what the true risks really are..." ( http://www.highrockcapital.ca/in-the-news.html )... and we went on to discuss what some of those risks are (in my "humble" opinion, as my mother always so succinctly put it).
As we are wont to do from time to time (post interview / discussion), we go back in our minds and wonder if there was something else that we might have said that would have been a bit more poignant.
For example, actually, the "real" risk, shared by the great majority of us, is that we will, somehow, out-live our money and that between now and that time, we best do what is most prudent to ensure that we don't.
The risk that we take, from now until then has to do with preserving and in most cases growing our wealth to continue to be able to provide what we desire as an "appropriate" lifestyle (and of course this varies amongst us all).
Inflation becomes a big risk because that will erode our purchasing power. If the costs of the goods and services that we need to live comfortable lives (and provide those same types of lives for our dependents) grow at an increasing rate, then we need to take that into account in our life-long equation.
Hence we talk about the math behind present and future value.
These days, we don't talk about inflation as much as we did back in the 1970's and 1980's when it was running at annualized rates of 8-9%.
We believe that our personal levels of consumption (and they are not necessarily what Statistics Canada's "basket of goods" for the purposes of calculating CPI are) will have a cost that grows each year.
Some of our clients have actually gone to the trouble of doing this experiment, but it is a whole lot of work. Their reactions were quite interesting however (surprise and shock), because in most cases, you will find that your actual personal rate of inflation is likely to be well-ahead of the annual rates that we are provided with by the number crunchers at Stats Can. Especially if you are dealing with tuition, health care and other lifestyle costs that are more "up-scale".
So add that to the list of risks: under-estimating your personal rate of inflation.
I know that is not what Catherine had in mind when she asked me about "the risks out there", but if we are under-estimating our future cost of living, that makes us more vulnerable to the running out of money concern.
Be that as it may, we save and invest our money to try and get a rate of growth (after fees and taxes) that will allow us to stay ahead of the erosion of our purchasing power.
If our personal rate of inflation is at 2.5 - 3%, then we need to achieve a rate of growth on our money (after fees and taxes) of at least 2.5 - 3% to just stay in our comfortable lifestyle (whatever that may include).
The really big risk now, is that there is no way to get that kind of return without taking some pretty substantial risk: some banks will pay you 1% (or a little more, but there is still a little risk and the return is taxable if it is non-registered money). So for all intents and purposes the risk-free rate of return (after taxes) is somewhere between 0 and 0.5%. Then you have to add in the fees. There are always fees (there is no way a bank does anything for free), regardless of what the headline says, just read the fine print!
Basically, at this point in time, there is no way to get growth and take no risk and there is no way to stay ahead of inflation without taking some risk.
So you have to do a couple of things (to lower your risk):
1) Do not be fooled by "headline" fees, without digging a little deeper. There are safe alternatives to banks (and as my friend and business partner Paul Tepsich will tell you, banks are not without their own set of risks).
2) Understand your personal rate of inflation and what you need to achieve to stay with it. (Do a Wealth Forecast).
3) You will have to take risk (even owning a house has significant risk attached, despite what you may hear and read). So you have to have a partner (a professional) who can guide you through the minefield of risk.
4) You need to be careful who you partner with. You need to understand their motivation: are you their priority? or are they their own priority? (if it is a bank, is the client most important or is the stakeholder)? That is crucial.
Want to be the priority?
That is what we do, we make you our priority and while the financial service industry is going the other way (stakeholders first), we are not, because we believe in the "service" part.
So think about your "true risk" when you have a moment.
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Saturday, September 10, 2016
No Stimulus "Fix" For Markets And
"Withdrawal" Gets Painful
So a bit of a taste of reality when the artificial stimulus is pulled away (no new European Bank Stimulus) and with a hint of the repercussions of what may follow if the US Federal Reserve raises interest rates when the FOMC meets in a week and a bit.
Pull away the thin layer of sugar coating of low interest rates and a real world full of uncertainties is revealed:
1) The global economy continues to struggle and is at risk (there is a high and rising risk of a US recession).
2) Global debt levels are at record levels.
3) Central banks have spent their "bullets" and need to keep a few in reserve for any unexpected "shocks".
4) The world "order" may be tested if and when there is a new US president.
5) North Korea has nuclear weapon capability and a "madman" at the helm.
Uncertainty = Volatility
And The CBOE Volatility Index (VIX) spiked by 40%.
The CNN Money Fear And Greed Index moved back to "Fear" territory (only a month ago it was in "Extreme Greed").
The S&P 500 lost close to 2.5% yesterday (on above average volume):
There wasn't the usual "safety" of bond markets (yesterday) as they sold off as well.:
Last Tuesday we reported on our weekly client webinar that our benchmark (which we measure our performance against) 60% equity / 40% fixed income (fully invested) combination had produced a total return of 6.34% (less fees and costs of approx. $.80 = 5.54%) so far this year and our client portfolio comparison was 6.33% (after fees and costs) over the same period.
As of Yesterday, that same benchmark is only returning 4.30%, 3.50% after fees and costs thus far this year. That is a big swing (close to 2%) and a lot of volatility.
(Source Bloomberg Total Return Analysis, Daily: Dec 31, 2015 to Sep 9, 2016 for ACWI /XBB)
Meanwhile our client who began with us in January, who's return this year to date had been 6.33% as of last Tuesday, is now at 5.69% (after fees and costs) as of the close of business yesterday, significantly less volatility.
As I have been rambling on and on for some time now, we have taken a very cautious approach to investing: choosing (often to the less than favourable views of our critics) to be less invested (than normally might be the plan) in equities (especially the very over-valued US equity market).
Hopefully, the reality of the impact on fully-invested portfolios is clear from yesterday's example. If that is OK for you. "Keep Calm And Carry On" (as they say).
However, if you prefer to sleep better at night, there is a way to get reasonable (perhaps better) risk-adjusted returns (less risk, same or better return) and that is through the use of a more tactical approach to investing (rather than the always fully invested 60 /40 model).
Our clients sleep better at night.
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Friday, September 9, 2016
Wednesday, September 7, 2016
Why Are Folks Surprised?
The Bank Of Canada Has Been Wrong For At Least 2 Years Now!
Don't get me wrong, I have a great deal of respect for Stephen Poloz, he is a very smart (and well-educated) individual. However he, like his compatriots to the south, east and west, have been overly optimistic about their expectations for a global economic recovery.
This (the art of economic forecasting) is not science, this is psychology. The central bankers of the world have done what is in their power to do: keep interest rates low, monetary policy "stimulative" and be vocally optimistic.
However, despite their best efforts and intentions, it has not been enough. Equity market participants have bought in, driving prices back to record highs (especially in the US), but businesses are not convinced and have held back investing in productivity advances and the global economy has struggled and earnings are entering their 6th consecutive quarter of annualized negative growth.
Cheap money was intended to let the deleveraging process (paying down debt) work its way through the system, but it has only encouraged greater levels of debt: in Canada, the most highly leveraged and risky households have only added to their debt burden and this frightens both the CMHC and the Bank Of Canada.
Complacency is rampant in the Vancouver and Toronto housing markets: "it has always gone up, so that will continue" is the mantra for those who are paying what we "value" oriented folks consider to be outrageous prices.
Everything economic moves in cycles: it always has and it always will. The timing of those cycles is what is not predictable, but there will always be a peak and a trough and the peak is coming (if it is not already here) and the trough, hopefully shallower than the last one, will follow.
Yellow flags are up and the red one's will soon be flying. Pay heed to the Bank Of Canada's warning signals: they are no longer as optimistic as they once were. That has to stand for something.
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"Timing" The Market
There are many academic studies that will show that over the long-term, trying to consistently time the market (buying the lows and selling the highs) is not as successful a strategy as a simple "buy and hold" over the same time period.
Agreed!
And that is the argument for the "core" of any portfolio.
It still doesn't excuse the fact that investors have parked close to $6B in an RBC balanced mutual fund with an MER of 2.36%
What am I missing?
Do people actually look at the costs associated with owning this stuff? It riles me up!
But, I digress....
There is a place in a portfolio for "timing", when it is done by the professionals:
If you have new cash to invest and a re-balancing of your portfolio concludes that a certain % of that cash needs to be invested in the S&P 500 ETF (as an example, not as a recommendation), but all the metrics suggest that it is close to its all-time highs and very expensive, why not wait? (especially if you are already exposed to that asset class).
If you are paying a fee for having your money managed, wouldn't you expect your manager / advisor to at least make that consideration? It can make a difference.
There are advantages to be had by being tactical. Not the whole portfolio, mind you, but just a certain portion.
It is what sets the good managers apart from the pack: the ability to pick their spots (to buy and to sell). It is what I would expect if I were paying a manager to manage my money. I would want some value for the fees that I pay.
So have a "core" of your portfolio fully invested, but have a portion of your portfolio that is tactically managed (by someone who knows what they are doing).
And for your own sake, please research the costs!
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