Protecting Your Nest Egg In Volatile Times
The sky is falling, or so it would seem. After all, the situation we are finding ourselves in is not one that has occurred in anyone’s lifetime – young or old. We have seen viruses before. We have also seen diseases, wars, famines, and great recessions to name a few. Never have we, as a global society, been faced with such a common threat, such commonality in our vulnerabilities. Make no mistake, humanity will overcome this challenge. There will be some tragic loss along the way, but humanity will overcome, and humanity will learn. Health care systems will improve, governments will adapt, and companies will potentially be forever changed in how they conduct business globally.
We are all bombarded with so much information daily right now it is difficult to aggregate all that information into a cohesive thought such as “How will this impact my Family?”. Those of us who are fortunate enough to remain healthy may be faced with financial difficulties. Will I have a job? Will I be able to pay my expenses? How will this affect my plans for Retirement?
As Financial Planners and Portfolio Managers, we are charged with the responsibility of helping clients answer these questions. Given this unprecedented situation, and its immediate impacts on markets and economies around the world, we thought it would be useful to share how we approach volatility when it comes to managing our clients’ life savings.
Firstly, we prefer to be PROACTIVE rather than reactive. Stock markets have been overvalued for a considerable amount of time. Over the past 2 years we have strategically allocated client funds to Private Alternative Investments that do not react to swings in public stock markets or bond markets. This is the exact approach being taken by Canada Pension Plan, and pension plans around the globe. By investing in things like Infrastructure, Real Estate, Private Equity and Private Debt, Pension funds can earn very strong rates of return with a lot less volatility. Simply put, when public trading is removed, so are emotions like fear and greed.
So why doesn’t everyone invest in Private Alternatives? To be clear, these investments are not new. In fact, they have been around for decades. Unfortunately, they have not generally been made available to the retail public. In order to access these types of investments, there are certain criteria that often limits access to the wealthiest 2% of Canadians. Those that do qualify, are often subject to stringent limitations on liquidity. For many Canadians, this lack of liquidity presented a problem so Alternative Investing has historically been a space reserved for wealthier Canadians, large Institutions, and those who do not consider liquidity to be as important.
The traditional investment portfolio is based upon something called Modern Portfolio Theory. Are you ready for the interesting part? Modern Portfolio Theory was invented in 1952! Not very modern at all, is it? In fact, the investment industry in Canada today is still guided by these same principles. This is how investors (and advisors) balance risk and return. Today’s BALANCED investment fund typically consists of 60% Stocks and 40% Bonds and targets a 5% rate of return. When you are finished reading this article, I invite you to Google the following: DEATH OF THE 60/40. What you will find is an endless list of articles discussing the reasons why many bright minds feel this traditional, and extremely common approach no longer works. Stock markets have become more volatile and record low interest rates have driven government bond yields well below inflation. Some Income investors have even turned to the stock market as a source of income while bonds have done so poorly. No wonder Canada Pension Plan, one of the largest pension funds in the world, has been steadily moving away from these asset classes.[i]
At Richardson & Associates, we pay attention to where the SMART MONEY is heading. After years of record growth, stock markets became well over-valued in recent years. At the same time, Bonds have had little to offer in terms of income or growth. We began to scale back from these public markets in 2018 and 2019 and introduced Alternative Investments into our portfolios. As discretionary Portfolio Managers, we have been able to offer these products to ALL our clients and we have been able to do so while maintaining a very reasonable amount of liquidity.
Currently, global governments and companies alike are invoking a range of policies to stem the spread of the COVID-19 Virus. As of March 19th, Canadian and US stock markets have retreated 30% and 28% respectively this year. Since their highs in February, they have dropped 34% and 32%. While fear of a global pandemic has set in, investors are reacting by fleeing the stock market to protect their savings. Many of the traditional (broken) 60/40 Balanced investment funds have suffered steep double-digit losses, ranging from 10-20%. The largest of mutual fund in Canada, the RBC Select Balanced A fund was down -17.43% this year as of Friday[ii].
So, how are WE doing? We are pleased to report that our balanced equity and our pure equity funds have experienced less of this drop when compared to the “broken” 60/40 model. This is due largely in part to the consistency and quality of our investments. As well, many of our clients have chosen Alternative Investments such as the Rockridge Real Estate & Debt Pool, which have continued to grow in the face of public market volatility. We have also increased our cash reserves and are eager to re-deploy that capital into the stock markets when the right opportunity presents itself. In fact, we began our bargain hunting this week, as markets began to show signs of recovery in wake of the large stimulus bills being passed in the US and Canada. For the time being our focus remains on protecting our clients from this sort of volatile environment.
If you are concerned about the global financial markets or want to benefit from our team’s exclusive access to private Alternative Investments and pension style portfolios, please don’t hesitate to contact us. We look forward to hearing from you.
Until then, stay healthy and stay safe.
-The Bill Richardson & Associates team
Sources:
[i] https://www.theglobeandmail.com/business/article-shift-from-stocks-boosts-cppibs-returns/
[ii] https://www.morningstar.ca/ca/report/fund/performance.aspx?t=0P0000706A
I have prepared this commentary to give you my thoughts on various investment alternatives and considerations which may be relevant to your portfolio. This commentary reflects my opinions alone and may not reflect the views of Harbourfront Wealth Management. In expressing these opinions, I bring my best judgment and professional experience from the perspective of someone who surveys a broad range of investments. Therefore, this report should be viewed as a reflection of my informed opinions rather than analyses produced by HarbourfrontWealth Management Inc.”
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