A Return to the Average

November 7, 2018

 
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We’re sure you’ve noticed the recent market volatility.  

Stock and bond markets pulled back recently, amid fears that rising interest rates and trade uncertainties between the world’s two largest economies would erode global growth, corporate profits, and equity valuations.

The retreat has been broad in nature, with no region left unscathed. As of Wednesday, October 31st, major markets were in correction territory from their peaks (a drop of 10% or more): 

  • TSX (Canadian market) -8.1%

  • S&P500 (US market) 0.3%

  • MSCI EAFE (International markets) -12.9%

  • MSCI Emerging Market -19.3%

  • S&P International Corporate Bond Index -6.69%

  • FTSE TMX Canada Universe Bond -0.96%

*Year to Date returns, Source Bloomberg

While equity and bond markets pulled back, expectedly, so did our models:

  • Westmount Wealth Growth Model -2.19%

  • Westmount Wealth Income Model -2.71%

 *As of Nov 1st, 2018

 

While we all wish our portfolios would only go up in value, the reality is that there are inevitably periods where values drop. Our goal is to limit the depth and severity of swings and weather the storm through prudent asset allocation and pension style diversification, like investing in Real Assets. 

The use of private investments, that do not trade on the stock market, like RISE Properties Trust (up 9.01% YTD) and Antrim Balanced Mortgage Fund (up 4.5% YTD) help diversify our models and reduce drawdowns.  We will continue to evaluate this space for additional investments as we move further into the late stages of this economic cycle. 

Similarly, our use of hedge funds like Picton Mahoney Income Opportunities Fund (up 1.83% YTD) has helped to protect against the detrimental effect of rising interest rates. 

THINGS TO REMEMBER

Since 1980, the average intra-year decline in the S&P 500 Index has been around 14%.  The last time that we saw an intra-year decline hit the average was 2011. Said differently, it’s been 7 years since we’ve had average volatility in the markets (never mind above average volatility). This recent correction is simply a return to the normal. 

Furthermore, intra-year declines in no way diminish the likelihood of annual returns finishing positive. Since 1980, despite intra-year declines of -14% on average, the S&P 500 has delivered positive returns in 29 of 38 years, or 76% of the calendar years.

 

*Click to enlarge

 

Last year was a remarkably calm year in equity markets, and that’s probably making this year’s volatility feel more pronounced. For example, for all of 2017, the worst decline was limited to 3%, a situation last observed more than twenty years ago! Volatility may be uncomfortable, but it is a normal part of investing and also presents long term opportunities.

We’ll leave you with a quote from a little-known 20th century investor:

We don’t have to be smarter than the rest, we have to be more disciplined than the rest.
— Warren Buffet

As always, we continue to monitor the portfolios on a daily basis and welcome any questions you may have.


Warm Regards,

 
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Matthew Evans, CFP®, CIM®  | Portfolio Manager
HollisWealth®, a division of Industrial Alliance Securities Inc.
m.evans@westmountwealth.com  

Lorenzo Pederzani, CFA, CFP®, FCSI®  | Director, Private Client Group & Portfolio Manager
HollisWealth®, a division of Industrial Alliance Securities Inc.
l.pederzani@westmountwealth.com  

 
 
 

This information has been prepared by Lorenzo Pederzani and Matthew Evans who are  Investment Advisors/Portfolio Managers for HollisWealth® and does not necessarily reflect the opinion of HollisWealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisors/Portfolio Managers can open accounts only in the provinces in which they are registered.

HollisWealth® is a division of Industrial Alliance Securities Inc., a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.