Summer Reading List - Best of the Month
Misconceptions About Diversification
“Here is part of the tradeoff with diversification. You must be diversified enough to survive bad times or bad luck so that skill and good process can have the chance to pay off over the long term.” – Howard MarksThe markets have always acted crazy at times because people are emotional, but investors always seem to think that the most recent cycles have been more volatile than they were in the past. That’s not the case, but drawdowns are always more painful when you’re living through them in real-time.It’s easy to look at historical charts in terms of losses and volatility because you know how it all turns out, but in real-time things are never certain. When time slows down investors can make mistakes because they panic and abandon any semblance of a plan. There’s a constant temptation to change your portfolio, plan or strategy because of something that just happened.Remember the flash crash last summer that saw some fairly large dislocations in a number of securities and markets? In August of 2015 the S&P 500 fell 7% or so in just two days. Markets recovered fairly quickly but a few days later there were a number of stories praising a certain black swan fund:A 'Black Swan' Fund Makes $1 BillionAs market collapsed, hedge-fund firm Universa Investments gained roughly 20% on MondaySimilarly, the Brexit panic from a couple weeks ago saw the S&P 500 fall more than 5% in a couple days, with more carnage throughout the global markets. I’ve seen a number of stories showing the performance of various strategies over that time, including this one on risk parity:How Brexit Surprised Risk ParityLow volatility prior to the UK's landmark referendum may have lulled some investors into a false sense of security, according to research Investors seem to be looking at the performance of portfolios, funds and strategies over shorter and shorter time frames to assess their desirability. Who cares how much money a fund made or lost in one day? All that matters is what investors did or didn’t do with those gains or losses and whether it materially impacted their long-term performance.This isn’t so much a commentary on the merits of these two strategies, but rather a discussion about some of the misconceptions about diversification.People are paying more and more attention to how certain strategies, asset classes or investments perform over shorter and shorter time frames. Investors are constantly looking for the best or worst performing sector/smart beta style/ETF/hedge fund/portfolio strategy during the latest two day or even two month sell-off or rebound.That’s not how you build a long-lasting portfolio.Since no one really knows how correlations will change and adapt in the future, it makes sense to build a portfolio with several different investment styles and strategies. But this idea can be taken too far when you try to account for every single potential risk that exists.Yes, it’s a good idea to understand how the various pieces of your portfolio generally act when there is turbulence in the markets, but it becomes a problem when you’re constantly window-shopping to try to find the best hedges or diversifiers. Negatively correlated assets sound great in theory, but they also increase the odds of lowering your overall returns. You can’t eat risk-adjusted returns after all. Each individual fund or security you hold is much less important than how all of your investments function together to reduce the overall risk in your portfolio.Short-term performance numbers tend to miss the main tenets of true diversification.Diversification is not about: Protecting you from terrible days, months or even years in the markets. Hedging every single risk or hiccup in the markets. Avoiding market volatility. Sidestepping every market drawdown. Finding strategies that will make you feel like a genius when the broader markets sell-off.True diversification is about: Protecting you from terrible results over long time horizons (the only ones that should matter). Spreading your risks. Ensuring you can survive severe market disruptions and still be able to achieve your longer-term goals. Planning for a wide range of outcomes. Managing your investments without knowing how the future will play out. Reducing the probability of a large loss, but not completely eliminating risk altogether. Not going broke. Giving up on home runs to avoid striking out.There’s no perfect way to completely hedge the downside of the markets while also enjoying all of the upside. Yet that’s what many investors are looking for when building their portfolios or hiring an investment manager.Diversification isn’t about fully insulating your portfolio in the short term. Diversification can help at times in the short-term, but it’s really a long-term strategy.They say perfect is the enemy of good. Investors miss out on good results by trying to be perfect. Trying to construct the perfect portfolio for every single market environment is a great way to own a bunch of competing holdings that don’t really get you anywhere. Plus, the ideal portfolio mix and strategy are only going to be known in hindsight.The hardest part about long-term investing is dealing with the short-term movements in the markets. Diversification can help, but it’s not the be-all, end-all, nor should it be. Investors can’t expect to earn money in the markets if they’re unwilling to accept periodic fluctuations in their holdings.Diversification works but it’s a strategy best suited for the long-term investor.By Ben Carlson July 12, 2016
Warning! The Following Headlines May Trigger Excuses Not to Invest
Negative events in the media may cause people to react emotionally and lose sight of their investment strategy. In the past three decades alone, there have been a number of events that may have kept investors on the sidelines. When you look at the big picture, over the last 30 calendar years, the S&P/TSX Composite Index*
gained approximately 864% or 7.8% per year and 21 of the 30 years had positive returns.
Year S&P/TSX* World Headlines
1987 5.9% "Black Monday"
1990
IRAQ Invades Kuwait
1993 32.6% World Trade Centre Bombed
1997 15.0% Asian Market Crisis
1999 31.7% "Y2K" Chaos Predictions
2000 7.4% Tech Bubble Burst
2001 -12.6% WTC Attacks in New York
2002 -12.4% Worldcom Bankrupt
2007 9.8% Panic of 2007; Billions of Bank Losses
2008 -33.0% Subprime Mortgage Crisis;
2009 35.1% Chrysler & General Motors File for Bankruptcy
2010 17.6% Greece ‘Contagion Fears’; "Flash Crash"
2015 -8.3% China’s Economic Slowdown; Oil Prices Low
*The S&P/TSX Composite Index percentage total return per calendar year.
What Has History Taught Us?
Canadian stock market declines and recoveries (S&P/TSX composite total return index). Those individuals who invest regularly in a diversified portfolio and stay invested for the long term have typically benefited.
The following chart illustrates historical downturns in the Canadian equity market and its subsequent recoveries.
Length of Decline Depth of Decline**
1 yr Later 5 yrs Later 10 yrs Later
4 mths ending Nov 1987
-25.5%
14.5% 31.9% 193.3%
10 mths ending Oct 1990
-20.1%
18.6% 67.9% 294.5%
4 mths ending Aug 1998
-27.5%
28.1% 47.1% 200.3%
25 mths ending Sept 2002
-43.2%
22.5% 152.5% 155.2%
9 mths ending Feb 2009
-43.4%
47.6% 102.4% –
Averages
-32.0%
26.3% 80.4% 210.8%
Source: Morningstar® EnCorr® Bloomberg Finance L.P.
**Based on the assumption that investments are made at the beginning of the month in which they occur, and the percentage rate in the portfolio decline is calculated through to the end of each month referenced in the above chart. Indicies are unmanaged, do not have fees and are not
available
for direct investment. ®©2016 Morningstar is a registered mark of Morningstar Research Inc. All rights reserved. All trademarks are the property of their respective owners.
Chart of the Month
Dividend Growth vs. Toronto Housing vs. S&P/TSX Composite TR.June 30, 1998 to February, 2016 max common time (monthly).
Currency CDN $. Source Data: Total Return.
Dividend Growth Total Return 227.0%
S&P/TSX Composite TR 163.6%
Toronto Housing (Average) 143.7%
Dividend Growth is represented by TD Dividend Growth - I. Toronto Housing is represented by (Teranet Housing Price Index Data). Indexes are unmanaged and their returns do not include any sales charges or fees as such costs would lower performance. It is not possible to invest directly in an index.
Why won't Canadians pay for investment advice?
by Rob CarrickJuly 14, 2016
A great piece by Globe and Mail columnist Rob Carrick about the cost of investment advice. Click
to read Full Article
Ontario Auto Insurance is Changing
Reminder to our client who are Ontario drivers: auto insurance reforms come to Ontario on
June 1, 2016
. We pulled together some of the changes you can expect to see so that you have a better understanding of what's going on with your auto insurance.
A reminder to our client who are Ontario drivers: auto insurance reforms come to Ontario on
June 1, 2016
. We pulled together some of the changes you can expect to see so that you have a better understanding of what's going on with your auto insurance.
What You Need to Know
A minor collision, that your fault, may not affect your rate
Starting June 1, 2016, minor collisions that you cause may not factor into your car insurance rate if...
Pay your premiums monthly? Your payments may decrease
Many companies charge a little extra to cover the cost of administering monthly payments. The maximum...
Hurt in a collision? Some of your Accident Benefits are changing
Some benefits that were once considered "standard" have changed, especially the total coverage amount for...
De Thomas FInancial Corp. is not an authorized auto insurance broker. The above is for informational purposes only. If you
would
like further
information
please contact your auto insurance broker.
Billion Dollar Fund Manager Comes Out Of Retirement To Bet Against Canadian Real Estate
Click
for Full Article
Marc Cohodes - 55 year old retiree is a Wall Street legend