Just over two years ago I wrote A Balanced Perspective on Balanced Funds on the performance of Canadian balanced funds compared to their benchmark. I focused on the longer-term results over 3, 5, and 10 year periods, looking both before fees and after fees. I thought the time frame was interesting back then because the end date was March 2020, the previous bear market. Given the massive rally that happened after that, and the bear market we are in now, I have revisited how Canadian balanced funds are doing in terms of keeping up with or exceeding their benchmark returns. Have they been able to add extra return through the big ups and downs in the markets?
It’s Different This Time, Again
So far in my career I have experienced 6 bear markets and 4 (probably going on 5) recessions. What has this taught me? That while every time is different, every time there are similarities too. In 2022 two different things are the Russian invasion of Ukraine and the cryptocurrency bust. The things we have seen before are high inflation, growth stocks breaking down, and central banks raising interest rates. Watching your portfolio go down during a bear market is stressful. But looking back over the last 100 years, as a group the businesses that constitute the stock markets have been able to adapt and move through the tough times and return to generating profits for their investors.
Is Value Still Value?
Two years ago in my blog Red Alert: Value is Value I looked at the extraordinarily long period of time that value stocks had underperformed growth stocks. I was looking to answer the question of whether it was time for the trend to change. The conclusion was that “we are getting close to when value should start outperforming growth for an extended period.” The trend lasted a few months longer and then became range bound, until the more speculative areas of the market peaked. Since then, value has outperformed growth and the question is, again based on historical data, does it have further to run?
Barely A Bear
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.
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.
Rising Rate Redux
Rising short term interest rates are ahead of us in 2022. The Federal Reserve (Fed) in the U.S. and the Bank of Canada are both poised to raise their benchmark rates. Current expectations are for the Fed to make the first of a series of increases to the Federal Funds rate in March. If this happens, we have plenty of precedents to look back on. As I said in my first blog in 2020, history is no mystery and gives us guidance on how the stock markets may react.
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.