I hope this letter finds you and your family well and that your Thanksgiving was filled with much to be grateful for. We’re experiencing a very long summer in the west of Canada which has made up for the cooler months of May and June. Our family made the most of this gift of fine weather and we’re hopeful that you did too. As winter quickly approaches and many of you make travel plans to go south, I would like to provide some insights as to what we’re seeing in the financial markets and to give you some peace-of-mind as we navigate this recessionary time together.
To begin, I am grateful that you have been so remarkably patient regarding the bear markets and recessionary environment we’re experiencing. Our clients, in general, appear to have a very mature approach to these macro events about which we have little control. We wish to congratulate you on this tremendously wise approach to the custodianship of your financial affairs. A custodianship we share as a team; advisor and client. While many of you have been with us for a number of market cycles and realize that the patient investor does well over the long term, we do realize that the journey takes its toll on our nerves from time to time. This is normal! Even the most tenured clients and investment professionals get weary after many months of negativity. Although these feelings are expected, we’re here to ensure you know you’re not alone. There is much going on behind the scenes with your portfolio management teams and of this you should be well aware. Read further to rediscover some valuable nuggets of truth in the articles below.
Our Normal Human Responses to Feelings of Uncertainty
After nearly three decades of helping clients navigate financial markets I’ve noticed that there are similarities in terms of how we respond to adversity each time a negative cycle comes into focus. Psychologically speaking, it’s quite a rollercoaster to endure bear markets and I’m seeing that most of us tend to experience similar emotional responses. Here are a few of the most common thoughts expressed by clients as we journey, once again, down this recessionary road:
- How long do you think this will continue?
- This was inevitable, how come the experts can’t predict it better?
- Should we be changing the portfolio managers we’re using?
- What if this economic downturn continues indefinitely?
- Is cash a good idea right now?
- What should we do differently?
- I missed selling my house at the peak, what now?
- My mortgage is up for renewal, what should I do?
In response to these very good questions brought about by the uncertainty we’re feeling about the economy and the markets, I have the following insights: Historically speaking we have come to know that timing the ups and downs in the markets has proven to be nearly impossible to perform with accuracy over the long term and, consequently, the majority of the best management firms avoid this dangerous trap. Our financial advisory firm has espoused the time-tested approach in which we trust our select portfolio managers to make portfolio decisions regardless of the market conditions. Let’s not forget that they are the experts in this highly complex field. Over the years I have worked hard to educate our clients to allow each portfolio manager’s careful expertise to guide us through difficult markets (not just through the good times!). In our professional experience, removing our personal emotions from the investment equation is essential. It’s fundamentally important. It also eliminates the potential for costly errors which invariably result from trying make big “calls” on market directions. You can expect us to remain resolute in our commitment to refrain from market timing both today and in the future. We choose the portfolio management teams and the investment firms they represent with much care, so it’s important that we show them the trust and confidence they’ve earned over decades of experience. During difficult markets is especially where these teams earn their proverbial “keep”.
There are no shortage of “armchair experts” and “hind-sight warriors” who’ll try to convince us about a myriad of things which we could have done differently with our financial decisions. I recall that when the polarizing figure Trump got elected as US President there were countless political and financial “experts” (and lay-folks too) predicting doom and gloom in the markets and yet those 4 years were some of the best growth markets many of us have ever experienced! The facts just described are not a political statement, but one which simply speaks about the truth regarding the difficulty in predicting what will happen in the future. The news media tends to create a lot of hype one way or another about political figures and their potential impacts on the markets, and such hype rarely leads to accuracy in market predictions! The historical record bears this out.
Portfolio Managers and Active Management
When we assess the quality of portfolio management teams for our clients we look from a number of different perspectives including, but not limited to:
- Performance relative to peers,
- Absolute performance,
- Management style (value, growth, etc.),
- Diversification of asset classes and industries,
- Tenure of the team and trustworthiness of the firm,
- Risk ratings,
- Geographic diversification,
- Currency hedging
- Taxation efficiencies,
- Industry recognition, accolades, and awards etc., etc.
As you can see, choosing portfolio management teams and their mandates is a highly complex endeavor. To be fair, not even the best management companies and teams always beat their peers. And, we’ve seen over the many years, even the best portfolio management teams have no control over the market prices of even the most exceptional stocks and bonds. During significant market downturns (like we’re presently experiencing), there is no magical safe hiding place for broadly diversified portfolios. However, the careful management decisions and diversification of investments made by quality portfolio managers does make a big difference in terms of helping to limit downside capture and ensure participation in the recovery when it finally occurs.
You’re Already Doing Something!
From time to time during market downturns we feel the need to DO SOMETHING which might help improve our portfolio position more quickly or save us from some unpredictable future. While it may seem prudent and more comfortable to take some sort of action (change portfolio managers or move money to cash etc.), often such actions can be tremendously harmful to one’s financial position. Let’s reaffirm what we already know in our hearts, that is, that making changes based-upon negative emotions in the middle of a market correction is detrimental to one’s financial well-being. Thankfully, this message has become well understood within our client circles, but it’s important to remind ourselves from time to time. Depending upon the month one uses to mark the start of this market downturn, we’re about 8 to 10 months on the journey. In the grand scheme of things, this is not an abnormally long duration for such market corrections. Let us remember that investment markets tend to be forward looking! Just as the markets corrected many months in advance of the actual arrival of the recession, markets also tend towards recovery sooner than economic indicators foretell. In the background, behind all the headline news, your portfolio managers are actively positioning the hundreds of investment positions they hold to maximize long term returns with the least amount of risk within their mandates. This is a very busy time for them! Much is happening withing each portfolio behind the scenes. “You”, through your portfolio management teams and our financial counsel, are taking daily action to safeguard your financial well-being.
It's important to note that most people experienced three very strong years of stock and real estate market growth leading up to these recessionary, bear markets. Those years helped to protect us from the inevitable arrival of this recessionary period. As we move forward into the future, we hope you draw strength knowing that good times will invariably return when the moment is right.