Thinking Outside The Box!
Don’t follow the herd! Most investors deal with myopic financial advisors. That is, they have a very narrow view of the Investment World (i.e. usually just Canada). They also tend to follow the conventional wisdom of diversifying portfolio risk by allocating 20% to 80% of their portfolios to fixed income assets (i.e. bonds). For a lot of the time that approach is simply WRONG!
Risk Tolerance vs Volatility
Investors are conditioned to focus on perceived RISK as opposed to what they should be focused upon, which is VOLATILITY. Sometimes mutual funds go up and at times they pull back, BUT over time, mutual funds increase in value. The choice of mutual funds makes a huge difference to the returns that you can realize over time. The more volatile funds increase the most. Less volatile funds do not increase as much as the more volatile funds.
Should you stay or should you go?
Stay Invested, ‘Except For Recessions,’ where the markets can drop 20% to 40%. We want to be on the sidelines for those recessions.
Listening to the talking heads in the media could cause you to leave too early. At the moment the risk of recession is very low and the Stock Markets are making new highs.
Loss of Purchasing Power
Understanding the relevance of purchasing power is typically problem number one for investors. Many investors fail to realize that their income needs will rise significantly, due to the effects of inflation, to just maintain a Constant Standard of Living.
The actual cost of living is increasing at a rate far higher than the core inflation rate that the Government gives us. In many instances it is increasing in excess of 10% annually. If you want to see the data to backup that statement, please contact me and I will be happy to give you my sources.
Home Country Bias
Every now and then the Canadian Stock Market has a really good year, i.e. 2016. Generally, the Canadian Stock Market lags (see performance for 2015, 2016, 2017 and YTD 2018). Unfortunately, most of my colleagues have Home Country Bias. They stick with what they know which is limited.
In the 1st quarter of 2018 the Canadian Stock Market as represented by the TSX index ranked 77th out of 93 equity markets.
The Centre of Global Power has shifted – Go Global
Four to five thousand years ago the economic power was centred in the Orient. China was the World’s economic centre. Since then the economic centre moved westward to the Middle East, then Europe, i.e. Spain, Portugal, Britain then to North America in the 18th Century. The economic centre has now moved back to the Orient.
Let Global Mutual Fund Managers make the decision as to what allocation should go into cash, fixed income, equites and in which countries. They have access to the necessary information to make those decisions long before the investing public does.
I consider Bonds (i.e. traditional fixed income) a four-letter word – Conventional Wisdom is Dead!
Traditional bonds are inversely related to interest rates. That is, as interest rates drop bonds go up. When interest rates rise bonds go down. Bonds, that are supposed to be safe and secure, especially for those approaching or in retirement dropped an average of 8% in the first quarter of 2018 as interest rates rose. Where was the protection?
There is a 60-year interest rate cycle. Interest rates peaked in 1980 and began to drop. Interest rates bottomed in 2010, went sideways until late 2015 then began the next 30-year rise.
In a slowly rising interest rate environment, expected over the next 20 – 30-years, bonds will not be a safe place for investors.
If your portfolio suffers from some or all of these failings call us for a review of your capital accumulation and preservation strategy.
