“Those who do not remember the past are condemned to repeat it” (George Santayana). Wouldn’t it be better if we could learn the lessons of history without having to experience the same pain over and over again?
What a difference a year makes. Around this time last year, global equity markets were off to their worst start to a year for as long as they’ve been recording data. With equity markets down ~15% in 2 short weeks, global banking giant RBS warned, “Sell Everything!”, cautioning investors to prepare for a “cataclysmic year” ahead. For those whose retirement assets were heavily exposed to stocks and oil (which was already down from $100 to $30 over the previous 18 months), it was a scary time, as Europe teetered on the brink of who-knows-what and the US faced a bitter election campaign.
Then came Brexit, and then came Trump—two shocking events that almost no one thought would happen—the impact from both of which is still entirely unknown. And what of markets? They mostly shook off the events of 2016 and finished, to varying degrees, in fairly strong form: +20% in Canada, +12% in the US, (+6% when measured in CAD), +5% globally, and -2% in Europe, with bonds up 1.5% after experiencing their worst month in a decade (what happened to rates can’t rise)? To the extent that one had significant exposure to risk assets, it was mostly rewarded. Of course, driving home drunk and making it safely doesn’t mean it was a good idea either.
Isn’t there a better way?
You’ve seen this movie before. It’s like a James Bond film—the same story, varied just enough to make one think that perhaps this time is different. Markets shoot up, and then they fall. Investors, having been rightly satisfied with stable, consistent, compounding growth in their portfolios, start wondering why they aren’t making more; why their portfolios aren’t keeping up with equity markets, if they should be taking more risk. The latest tech (marijuana?) stock is soaring, everyone has a hot tip, prudence and risk management go out the window. You don’t need to stay until the credits to know how it ends: The financial crisis of 2008 and the tech wreck of 2001/2002 caused widespread destruction in portfolios and severe trauma to emotions. And those were just two of the latest installments.
Growing your money consistently and conservatively can produce superior results to dramatic swings, with a higher likelihood of keeping you calm enough to earn them. Read here on how to win by not losing.
A dangerous claim
I heard an ad recently on the radio that, I think, does a tremendous disservice to investors. The ad made the following claim, “In five minutes, we’ll make you an expert investor.”
In any debate, it is important to define one’s terms. I’m not sure what their definition of “expert” is, but, by any measure, five minutes doth not an expert make. Luck should not be confused with skill. I can tell you this: It is a full-time job. The process we adhere to for the management of our clients’ assets is, quite literally, the ongoing product of tens of thousands of hours of work, research, experience and study, based upon the best practices from around the globe, such as those employed by David Swensen at the Yale Endowment Fund, with a constant commitment to ongoing learning. And for all of that work, we still don’t know what is going to happen. So we build portfolios that can participate when gains are there to be had, and insulate when they aren’t, making tactical adjustments to areas of greater relative strength along the way.
Warren Buffett’s words have graced our website’s homepage for many years: "To invest successfully over a lifetime does not require an extraordinarily high IQ, unusual business insights or inside information. What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from eroding that framework.”
Advice for Investors
Dow 20K has nothing to do with your efforts to preserve and grow your money, as we have previously written. And those markets that are so efficient and low-cost? Even after last year’s +20%, the TSX is still averaging a whopping 1.7% a year for the last 10 years (4.7% with dividends). And for that “lofty” return, you’ve had to endure tremendous volatility and dramatic losses along the way. The TSX Venture Exchange, even after last year’s +45%, is still compounding at an average of -12% for the past decade. Minus. Compound average annual loss. For a decade. In the US, it’s better, but not a ton—the S&P500 has averaged 8% a year for the last decade, or all of 5.5% for the last 15 years. With all the risk and volatility they come with, are those desirable outcomes? If so, there are no shortage of ways to access that exposure; just be prepared to stomach the volatility that comes with it. Should your portfolio have exposure to Canadian, US and Global stocks? Certainly. Should the health of your portfolio be solely determined by the direction of those markets? Not a chance.
This is a lesson many investors are seemingly doomed to have to learn the hard way over and over again. This author (a student of history in university) has often said that the curse of the human condition is each generation’s inability to learn from those that came before. Wouldn’t it be better if we could learn these lessons without having to experience the same pain over and over?
Consider, also, that bonds, historically the great volatility mitigators, are far more precarious today than they have been. As interest rates have been declining consistently for decades (pretty much to zero), bond prices have risen. This worked particularly well for the last 30 years at insulating portfolios when equities dropped. Today, bonds are still an important part of a portfolio, but one must allow for the likelihood that, as interest rates rise, bond prices drop. The conundrum facing investors today is the need for portfolio protection when both equities and bonds are falling. Enter the need for uncorrelated investments.
What should you do? Hire a qualified, impartial, professional team to guide you. Have a properly and appropriately designed plan and portfolio—specifically, one that can protect you when stocks go down and interest rates rise—by including exposure to non-correlated assets with a proven ability to increase portfolio returns. Stick to it and resist the normal behavioural mistakes that are so detrimental to investors. Remember, true diversification means that some things will be going down as others go up. Understand the risk you’re taking as well as the returns you’re seeking. Grow your money in a conservative, prudent fashion. Because you aren’t an expert investor, nor will you become one in five minutes. You’re an expert at what you do, and we’re here to help with the rest.
As always, we invite your comments and inquiries.
On behalf of Sean and Farialle,
Disclaimer: The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author's judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. The comments contained herein are general in nature and are not intended to be, nor should be construed to be, legal or tax advice to any particular individual. Accordingly, individuals should consult their own legal or tax advisors for advice with respect to the tax consequences to them, having regard to their own particular circumstances.. Richardson GMP Limited is a member of Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.