Is this officially a bear market? According to the market’s arbitrary definition of a 20% decline in the S&P 500 it is, but only using intraday data with the high price on January 4 and the low price on May 22. Using closing prices, we are down 18%, barely a bear but painful, nonetheless. But why quibble over a couple of percent. I think that the bear has emerged from hibernation. This view is consistent with the methodology I used for bear markets in History Is No Mystery: Part 1, the first blog I published two years ago. Having updated my charts on U.S. bear and bull markets, let’s see what they tell us about what may lie ahead.
Category: Portfolio Analysis
Advisor Advice
Wealth management, like in any other profession, has good advisors and wealth management firms and average ones. Below that are the “others”. How do you assess yours, and how do you avoid giving your hard-earned wealth to the “others”? Based on my experience, I have put together a list that you can use to assess your advisor and firm. You can also use it to evaluate other providers if you are not satisfied with your current one.
Lifetime Learning
Investing in the markets keeps you humble. The returns are hard to forecast. There are many risks to consider and measure. And your behavioural biases and those of investors as a group often get in the way of making the best decisions. I consider myself fortunate to have learned many great lessons from some of the best people, especially earlier in my career. I wish I could say that everything I learned was through avoiding mistakes and losses and making only big risk adjusted returns. But that isn’t the case, and it isn’t realistic. I also learned from my own mistakes as well as those made by others in the industry. This month I am sharing some of the most valuable lessons I have learned (so far!).
Rising Rates and Stock Styles
In last month’s blog Rising Rate Redux I looked at the total returns on U.S. stocks (S&P 500) and Canadian stocks (S&P TSX) in the months before and after the 1st rate hike by the U.S. Federal Reserve (Fed). As these are the standard market indices, think of them as the straight leg jeans in your wardrobe. But like jeans, there are more styles to choose from, and some will look better than others in the months after the 1st Fed hike.
Stock Return CAPEr: The Next Decade’s Returns
I have been in the investment industry long enough to know that it is difficult to forecast returns. I also know that markets can get into overvalued and undervalued zones, and then stay there or even go deeper in for much longer than I thought was possible. Having said all that, I still need to make judgements about the long term returns that asset classes will generate given their different risks. Although estimating long term returns is largely subjective, there are some objective tools that can be used. The Cyclically Adjusted Price Earnings (CAPE) ratio is one such tool. While I would not use it as the sole basis for estimating returns, it is interesting to see what it says about the current level of the stock market.
Alternative Asset Allocation: Tricks and Treats
The trick to adding alternative assets to your asset allocation is to utilize a rigorous process. This avoids the scary scenario where you have the wrong assets in your allocation or the wrong weightings on the assets. With the right approach, your treat is getting the optimal asset allocation relative to your risk profile and your needs.
Alternative Reality: Return and Risk
Stocks and bonds are the most common investments in portfolios. They are also the investments that we are the most familiar with and that receive the most media coverage. Yet, as I covered in the “Portfolio Pie” blog, 10% of the investable assets in the world are “alternative” such as commercial real estate and private equity. It is harder for individuals to find information on alternatives as they don’t trade on public markets. To help understand the reality of investing in alternative assets from a portfolio perspective, I look at the main types and how their return and risk has compared to bonds and stocks.
Heavenly Returns: Life Insurance as Fixed Income
I know what you are thinking. Isn’t insurance about getting tax free money when you die, not about investing? For sure that is the primary purpose. However, some life insurance can also be an attractive long term alternative to some fixed income in your portfolio. I recently went through an analysis of converting my term life insurance policy into a new policy. I am no insurance expert. But working with insurance professionals[1] I recognized the heavenly returns that can be available compared to fixed income alternatives.
MICs In Your Mix
Investing in units of a Mortgage Investment Corporation (MIC) is a way to bolster the yield of the fixed income portion of your asset mix. Currently, the 1.7% yield on a diversified portfolio of Canadian bonds remains low by historical standards. In the meantime, the likely transitory bump in inflation has seen the core inflation rate rise to 2.7%, implying a negative inflation adjusted return on bonds. So, let’s mix things up and look at how MICs may be one solution to bolster your fixed income returns.
Raging Bulls: Edifices vs. Equities
Housing prices and stock prices are hot topics, and both have been in raging bull markets over the last year. But who has been the heavyweight champion over time? Like many things in investing, the answer depends on the time frame and assumptions. So, let’s begin by introducing our competitors and the rules of the match.