Since our last email, sent out only 6 days ago, a lot has changed. In short, the last week has been a heck of a year.
Between markets dipping to nerve wracking lows, drastic measures being taken in developed countries struggling to respond to Covid-19 and toilet paper shelves in supermarkets emptier than a campaign promise, it’s seeming like the news cycle is all doom and gloom with no real respite coming in the short term.
We wanted to make it a point to reach out, not just with these newsletters, but with calls and individual emails as well. It has always been our experience that the best antidote to fear is better information. Only when we are well informed about a situation can we make a rational response.
Hopefully this newsletter gives you some peace of mind amidst the turmoil and, if you feel like you need more context, we are always more than happy to chat and give you an update over the phone.
Downside Capture:
We are in the process of proactively reaching out to all of our clients specifically to deliver this very important message:
You do not own ‘the market’.
When you see a headline on BNN or the news, you often see numbers quoted regarding the S&P500 (a measure of the 500 largest companies in the US, a good proxy for the US stock market) or the S&P TSX Composite (a measure of all companies trading on the Toronto Stock Exchange, a good proxy for the Canadian stock market). Trump’s favorite index, the Dow Jones Industrial Average (DJIA) is another such measure, although it’s much more concentrated and only consists of 30 very large industrial companies in the US.
Huge point or percentage swings up to 12-13% gain or loss in a single day of trading in these indexes is absolutely gut-wrenching. The sort of ride that you wouldn’t pay to go on at the Stampede fairgrounds for fear of losing your $12 mini-donut lunch. But the question remains: when these major market indexes are down 25-30%, what does that mean for the average investor?
In the grand scheme of things, the simple answer is: Not as much as you think. None of our clients actually have all (or even most) of their money concentrated in the companies that make up those indexes. Instead, we and the portfolio managers we know and trust use diversification. This technique means that, by spreading out an investment between a variety of holdings that behave differently, we don’t experience all of the ups or downs that more ‘pure’ investments like buying the S&P 500 and holding just that would entail.
While it’s a lot of fun holding that ‘pure’ investment when times are roaring, it really hurts to watch your portfolios dip far enough to wipe out nearly 2 years of those good time returns. Wouldn’t you instead prefer a portfolio that, on average, only experiences a portion of these huge downswings?
This is called ‘downside capture’ and refers to when you stack up your portfolio against these market indexes (or other benchmarks) and see how little of the downward slide you experience. When the S&P 500 is down 32% over 3 weeks and your portfolio is down only 10%, you are experiencing 30.3% of the downside. Not bad when you consider that by being in the markets at all you should expect some risk here and there.
In the long run, what this means is that you only have to ‘make up’ 30.3% of that slide to get back to normal, while those more aggressive investors who actually did ‘buy the market’ have to claw back much further to get to the same level ground once again. To do the math, by experiencing less of a slide, your portfolio only needs to return 11.2% to get back to an even keel. Our more aggressive investor would need to recover 47% to get to the same place (4.2x the required return).
Clearly, there’s something to be said for downside protection!
What’s coming next?
As clients who have worked with us for years can attest, there’s one major consistent position we take with markets: we don’t make predictions. Instead, we do our best to research and recommend portfolios that are well prepared for a variety of economic circumstances – whether bad or good.
In Canada, with border closures announced on March 16th by the PM and similar measures being enacted in Europe, we do expect that this will trigger a technical recession. This is defined as two consecutive quarters of negative GDP growth (the amount a country produces within its borders) and is a good measure of the ‘health’ of an economy. This comes from a combination of Supply Shock (there aren’t enough goods or services available to be consumed) and Demand Shock (when people can’t consume because they’re quarantined, isolated or laid off). Both of these factors will contribute to make 2020 a rough year for the global economy with some economists predicting that effects will last through to September and beyond.
As far as investments go, the one prediction you will get out of us is this: the markets will always rebound. We cannot say when that rebound will start or how high it will go after this, but we can be sure that it will in fact come back and grow to new heights eventually. Looking at a chart of markets over the past 100 years, whenever we ask someone when they would have bought in if they had perfect foresight, everyone points to the depth of a recession as the perfect buying opportunity – the only catch is that no one knows exactly when that will occur. In 2008, a well diversified Balanced investor who held the line was back to even after only 18-20 months – it was only the investor that sold to cash in a panic or held the wrong highly concentrated portfolio that suffered for year after year. We consider it our job to help our clients avoid this pitfall.
On a call with a client this afternoon, we heard the phrase ‘I guess this is a good time to keep on contributing to my accounts then, right?’ which means that our message is getting through. Similarly, ‘back office chatter’ among managers that we’ve been privy to have included phrases like ‘I cannot believe that companies with balance sheets this good are trading so cheaply right now’.
That’s the sort of optimism we think everyone could use right about now.
Resources:
In times this, we want to make sure all of our clients, along with their friends and family, have access to the resources needed to get through tough times. Here is some information that might prove helpful:
1. Mortgage Payments: Many mortgage companies are circulating emails now that describe their waiver of fees for ‘holding’ or ‘skipping’ payments on your mortgage. While there are some important factors to consider, we encourage all of our clients to reach out to their mortgage lender directly to explore the options if cash is really tight. We are happy to go over the long-term repercussions of using these options if you have questions.
2. City Resources: While most major cities have enacted contingency plans or emergency powers, they also have many resources to help out. For our Alberta based clients, dialing either 211 (general provincial services) and 811 (Healthlink specifically) are specifically set up to help Albertans get through this. If you’re having health concerns, problems paying utility bills or other issues, these are excellent resources to take advantage of.
3. Provincial Resources: Alberta, and many other provinces, have set up specific info congregation sites such as https://www.alberta.ca/coronavirus-info-for-albertans.aspx. These have great information on what to do in a variety of situations, as well as regular updates on how things are progressing in the province.
Meetings:
As a result of the spread of this illness, and in order to do our part to slow that spread, Up Financial is recommending that we all practice diligent hygiene practices and social distancing. These two activities, in combination, have proven the best way to manage widespread outbreaks all over the world.
If you had a meeting booked prior to April 15th, we will be in touch to reschedule or set up a phone/video meeting instead. If there is a matter requiring a wet-ink signature, we will work with you to get that done in as safe a manner as possible.
Thank you for your continued support – we hope everyone stays safe and healthy.
