Welcome to the Chalten Investment Review. It somehow feels easier for us to describe what this letter is not rather than what it is. It is not ever going to be a scoreboard or place to brag; nor will it ever be an apology or place for excuses. No “I told you so” and no crystal ball. The environment in which we live, work and invest is complex, ever changing and nearly impossible to predict. So, if anything, this is a simple pause for reflection on that environment, an opportunity to reflect on what might be impacting investment risks and returns, and a reminder of the importance of a disciplined and sensible approach.
Investing presents many challenges for people. To begin with, while successful investing requires a long term perspective, in the short term we see lots of ups and downs and constant information flow that makes us want to do something right now. Q3 2015 was certainly no exception. Too often investors react by trying to guess where the market will go next. This type of behaviour usually ends up working against them and volatility becomes their enemy. However volatility can be a friend – with a disciplined investment process it can provide opportunities to rebalance, to harvest tax losses and to systematically buy low or sell high. The key is to always remain disciplined – as an unattributed wise investor once said, successful investing over the long term is not timing the market but time in the market.
We always like to refer to what the evidence tells us and what the evidence consistently demonstrates is:
- The investment return you can expect is directly related to the amount and type of risk you assume;
- Your investment portfolio should be well diversified across asset classes, geographies and other dimensions of risk;
- A long term market buy and hold strategy will outperform one that tries to outsmart the market or pick winning stocks;
- Your allocation to different types of assets should be set based on your need, ability and willingness to take risk and maintained via disciplined rebalancing;
- Costs and taxes should be kept as low as possible
You never know where sources of return are going to come from, nor do you know where sources of risk will appear. For Canadians, investing in Canada has felt more like risk than return lately and that was as true as ever in Q3 of this year. Well diversified asset allocation ensures that you capture the returns when and where they occur and dampen the impact of specific risk of certain asset classes/geographies. Who knows, maybe the trend will reverse sharply over the coming weeks and months. The point is that nobody knows. In the long run the markets will punish the vast majority of speculators and reward disciplined, committed investors who accept that investment returns come solely from assuming risk in a sensible way.
Q3 Market Review
Market conditions during the third quarter were volatile. Just as fears over a collapsing Greek economy and the potential for continued instability in Europe subsided at the beginning of the summer, concerns shifted to the pace of growth of the Chinese economy as well as to doubts as to the stability of the Chinese stock market. The Chinese government tried its best to control whipsaw market movements at the same time as trying to strategically devalue the Yuan. Related concern over economic activity in China and supply demand imbalances left commodities ranking at the low end of asset class performance over the quarter. In September, market watchers turned their attention to Janet Yellen and the US Federal Reserve and whether or not the Fed would start to move away from the accommodative monetary policy stance they’ve been sticking with for years. On the one hand, positive US economic indicators supported a small rise in rates; on the other hand, concerns over global growth and market instability supported a wait and see strategy. In the end the Fed opted for a wait and see approach so we remain glued to our seats. Perhaps due to a combination of the above or perhaps due to combinations of other factors we haven’t thought about (nobody really knows) all equity markets ended the quarter sharply down, with Asia and emerging markets hit the worst in local currency terms. No surprise, bonds outperformed stocks over the quarter providing a nice diversifier for those with a balanced portfolio.
And then there’s Canada. Most investors tend to have a home country bias with respect to their investments. Canadians especially tend to concentrate their investment positions in holdings of Canadian stocks and bonds. Even investors holding a broadly diversified Canadian Equity fund are not nearly diversified enough as the Canadian stock market is heavily weighted towards the financial, energy and materials (mining) industries. Likewise, our economy is weighted to those same industries so Canadian dollar concentration is a double whammy for Canadian investors when commodities and the companies that produce and finance them are underperforming. The Loonie fell nearly 7% against the US dollar in the third quarter alone leaving it 15% down relative to the Greenback for the year. As a result, in Canadian dollar terms the Canadian stock market was down significantly over Q3 and is down year-to-date relative to other global markets. For
Canadian investors, Q3 of 2015 would have been a good time to be diversified internationally. Of course it all may reverse going forward however it’s dangerous to chase the market and a well diversified global portfolio allows you to capture positive returns when and where they occur and avoid concentrated specific industry and currency risks.
Financial Planning topics of interest
The pending Canadian federal election will likely impact your financial planning efforts. Earlier this year, the government raised annual TFSA contribution limits to $10,000 effective for 2015 but eliminated future inflation adjustments to the contribution limits – their argument is that Canadians need more flexible ways to save for retirement. The Liberals and NDP say they would reverse this decision if they came to power arguing that few would utilize or benefit from the additional contribution room other than the very wealthy. The different parties also have different views on how Old Age Security (OAS) should be structured, the importance of government sponsored pension plans like the Canada Pension Plan in supporting the retirement needs of Canadians, and also on the rules on how Canadians save and draw on their own personal retirement savings plans. Most recently the parties have offered alternative views on how government sponsored student loans should be structured. And of course the level and nature of taxation is always an area that reveals differences. So something for everyone to think about! Depending on which party or combinations of parties takes power you can expect changes that will impact your financial planning efforts so we are advising people to try to keep abreast of the issues and get in touch if they have any questions.
In summary, we’d remind you that volatility and uncertainty is normal and while it may seem straight forward to make sense of economic, political and market events in retrospect, it is a fruitless exercise to try to forecast them and their impact on markets. Change is also normal, whether it’s warmer winter temperatures or a new party in power in Ottawa. While change impacts the world in which we live, work and invest, most of these changes are beyond our control. We advise you to try to control what you can. When thinking about your investments, that means costs, asset allocation and who you choose to trust for advice.
All the best for the rest of the year!
Graham & Alexa