After 2 years of ‘steady’ returns with only small bumps in the road VOLATILITY (the bad kind) returned late September and is still with us.
If your first reaction (after opening your October statement) is to pick up the phone and say ‘what happened’ ( and I totally get that) first ask yourself this question. WHAT WAS/IS MY TARGET RATE OF RETURN? If you answer 2% then call your advisor (could be me) or bank and ask why am I down this much? If you answer anything above this the drawdown(drop in portfolio) from late September to now is simply the price you pay for AVERAGE (think 5 year averages minimum) returns above 1-5 year GIC returns. Five years ago the average return for a 5 year GIC was around 2% (fully taxable).
I would hope with the level of communication that I have with clients that the drop in values during October was not a surprise. IF YOU HAVE NOT HEARD FROM YOUR ADVISOR (not some head office dribble) then you may want to question what value you are getting. VOLATILITY CAN CREATE OPPORTUNITY (not perhaps over the next week but over the next 6 months to 2 years)
The purpose of these blogs are several:
Put my own thoughts together
Bring different opinions to you (institutional money managers)
Educate (sharpen the saw) so decisions can be made without fear
Perhaps provide a call to action (PRIVATE EQUITY AND DEBT AS AN EXAMPLE)
Over the last several weeks we have seen equity markets fall under stress of ‘trade wars’ and through earning season (started early October) we have heard corporations report good earnings BUT signal weaker earnings ahead. At the same time we hear the ‘FED’ and the BANK OF CANADA suggest that interest rates will continue to move higher to slow the economy (which corporations say is already slowing) and ‘protect’ us from inflation (this as my trip to the gas station is 20% less than a few months ago).
CONFUSED? We have every right to be. BUT THIS IS THE VERY THING THAT CREATES VOLATILITY IN THE EQUITY AND BOND MARKETS!!! There is no clear direction at this time (and often ever). Over 5 year periods this uncertainty most often works itself out BUT we are bombarded with daily information confusing our longer term goals and plans.
So far this year there are very few safe havens or investments that have behaved in the short term…except perhaps for PRIVATE EQUITY (such as Centurion Apartments, Avenue Living Apartments, Nationwide Storage) and PRIVATE DEBT (TREZ CAPITAL). These however are not magic bullets but they are (in my opinion) and important part of almost everyone’s portfolio. The qualifications for who can use these products changed for the better a couple of years ago and I have encouraged clients to take advantage of these changes.
QUICK TUTORIAL ON BONDS (bond funds and preferred shares)
First, most bonds are liquid (that means they can be sold. While being able to sell a bond is a positive this also create fluctuations in the price of the bond (what it can be sold for). If you purchased a 5 year government bond when interest rates were 2% and now interest rates are 3% for 5 year bonds what happens to the price of your bond? The value of the bond on your statement GOES DOWN. Why? Because new bonds pay more interest so if you needed to sell it than you would have to discount the price to make it behave like a 3% bond. Confusing? Yes it is!
BOTTOM LINE…when rates are going up the value of your bonds may go down and your statement reflects the current selling price NOT THE MATURITY VALUE.
REMEMBER…Bonds mature and they will mature at par even if they currently would sell for less.
It is VERY IMPORTANT to think of your bonds (and preferred shares) as INCOME VEHICLES. Focus on the income stream and perhaps in the case of preferred shares the tax advantages of the income.
Many of the bonds in our portfolios pay 4-6%+ each year. That is much more than a GIC and you can sell if need be. THE PRICE OF THE HIGHER INTEREST AND LIQUIDITY IS THE PRICE CHANGES BASED ON MARKET CONDITIONS…BUT THEY MATURE AT PAR
I have included a variety of investments and their returns in the short term and year to date for comparison purposes and general knowledge. As you can see there have not been to many places to hide in 2018.
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‘historical analysis does not reflect future returns’