The Letter G - Grandfather's Market

These are NOT your grandfather’s markets any longer.


Your grandfather certainly never experienced investment markets like the ones we contend with today.  Investing used to demand skill, and patience, and fortitude – all of that applies today still, as do many of the old saws as it relates to diversification, compounding returns and reducing risks amongst other hallmarks of investment success.  For the traditional investor today (which we are not), it also calls for a helmet, suit of armour and Gravol.


A short list of what has changed follows…

  • Cash rates used to earn you cash.  Banks no longer pay you much, if anything, on your liquid cash holdings.  It takes me off guard each time I tell a client we can get them 1.55% (as of early December 2015) on secure, liquid cash holdings and they express excitement in this higher than typical rate.  It is what it is, but it isn’t what it used to be.  And in Canada, it may be going lower for longer.
  • Bonds and preferred shares were formerly the domain for safely invested capital – earn a decent yield, capital remains secure and liquidity is there when needed.  Those were the days, my own Grandfather might be pondering.  The preferred share market decline has been astonishing, government bonds are yielding next to nothing and are subject to capital declines when the economic view brightens.  Safety no more.
  • Equity markets – where to begin?  Let’s take a quick look at the recent evolution in stock markets…
    • Buying a Big Mac in Russia was once novel.  World markets are more correlated than they ever have been.  Issues facing Greece, China or the Royal Bank of Scotland as examples all influence direction in equity markets across the world.  Diversification across international markets is no longer as effective as it once was due to the inner weavings of corporate footprints and earnings.
    • Volatility got you down?  More so than ever, when a company disappoints in its quarterly report, the stock may suffer an unusually large decline that doesn’t seem justified.  This certainly creates opportunity, however the trickle on effect and the damage done can be very painful, and very frustrating.  Depth and frequency of market swings has increased substantially in the past 20 years.
    • Computers are ruling the world.  It is estimated that 70% of trading on the NYSE is done by computers.  If all computers are programmed with an edge, than they are all likely working in tandem to some degree.  The removal of human decision making was the reason why one prominent US fund manager recently returned money to investors – with less disparity in volatility, there is less opportunity for profit.  Reasonable volatility can be a good thing, but not when all things move at a similar velocity and in the same direction.


Where does that leave an investor seeking stability of capital with predictable yield and tax-efficient growth in order to fund lifestyle requirements?  One must think differently about how to build an investment portfolio and fortunately, the good news is that there are options available and designed to meet financial objectives without the risks inherent in a very Canadian-centric portfolio passively and hopefully invested in cash/bonds/stocks.


My grandfather might ask – ‘what is this progressive way of thinking all about?’  The answer is that it is simply an approach that parallels institutional wealth management, the Yale Endowment setting the standard.  Again, the good news is that better diversification, better solutions, better risk management and better security is available to private clients all for the betterment of their hard-earned money.


‘Gee, that’s interesting,’ he would be likely to say,


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