OUR CALLS

I have had so many great conversations with you, our clients, over the past month or so.  We have also been speaking with many of your family members, friends and colleagues who want perspective on what is happening in the markets and how we are outperforming those markets.  If we still have not spoken with you (or you are thinking of putting us in touch with someone you care about – someone who could use a second opinion) please just reach out.  We are here, and happy to talk at any time.

Here is what we have been talking about in our calls:

With the volatility in today’s markets, our strategy is still the right one, just as it has been for many years now.  The markets are down, of course: the S&P 500, which we consider to be the best indicator of the market, is down more than 20% this year – a year that has had the second-worst first-half ever, after 1970.  In comparison, our clients’ portfolios are down less than 10%, which brings us approximately even for the past 12 months.  In other words, our clients are in essentially the same position as they were one year ago, and no client’s retirement plans have been negatively affected in any way, because we always build in a margin of safety by making conservative assumptions.  Everything is still completely on track.

We are outperforming the market, with less risk than the market – because our portfolios are not the market, but instead are custom-made for you, in alignment with your financial plan.

FINANCIAL PLANNING

We have also been talking about how important your financial plan actually is.  It guides us in everything we do and keeps us focused not just on your portfolio, but even more importantly, on maximizing your wealth after taxes and inflation, which is, after all, the true measure of financial wealth.  As part of planning, we are always looking for ways to leverage the use of life insurance, trusts, income splitting and other strategies.  These strategies include the use of prescribed rate loans, something we referred to here and here in past editions of Marche Monthly.   A prescribed rate loan is a method of transferring income from higher income earners to family members who are lower income earners, which lowers the family’s overall tax bill, thereby preserving more of their net worth.  As part of our services, we administer all aspects of these loans for our clients, including all interest payments.

We have taken advantage of prescribed rate loans for many of our client families, allowing them to lock in an all-time low rate of 1% forever (a rate opportunity that may never appear again, since the rate recently doubled to 2%).  

Back to the market:  as volatility continues, we persist in taking advantage by buying certain businesses we believe to be undervalued – we are buying them on sale, in other words – along with longer-dated bonds, with which we continue to lock in higher interest rates for your savings.  We expect opportunities will continue to present themselves in the coming months, and as they do, we will capitalize on them.

INFLATION AND INTEREST RATES

Other topics coming up in our conversations are inflation and interest rates.  What do they mean for the housing market and the economy in general?  This is definitely a relevant question, considering that our housing market is a substantial part of our economy.

Here is the answer is a nutshell:  rising inflation leads to rising interest rates, and rising interest rates temporarily lower the value of all assets, including housing and equities.  As mentioned above, the S&P 500 is in our view the best indicator of the overall market – and it is down more than 20% this year.  Not surprisingly, the housing market is also on the decline, as we have seen home prices, in some parts of Canada, drop 20% in a matter of weeks.  

Note my use of the word “temporarily” above.  Over time, the best protection against inflation has been proven to be owning good companies and real estate, since eventually inflation passes through to these asset prices.  Historical data, in fact, shows that stock markets tend to ultimately rise in periods of rising interest rates.  For example, as you can see in the chart below, three key indexes – the Dow Jones, S&P 500 and Nasdaq – all rose during four of the last five rate-hike cycles.

This should reinforce that long term, your plans remain on track, because we own the right type of assets for this environment.  It is simply a matter of having confidence in and sticking with our strategy.

We have also had many conversations about debt and credit strategies: we are reviewing our clients’ strategies and recommending whether, in this environment of rising interest rates, they should pay down debt, invest more, or both.

Our answer depends on each person’s specific circumstances, because they are all different – so just reach out if we have not already spoken.

ROBO ADVISORS

One of the most significant stories of the past several years has been the emergence of self-directed online trading platforms or robo-advisors, some of which are now laying off staff. I can think of many that started out by promoting passive investing without an advisor, which means buying an index as opposed to individual securities.  Which is just fine, if you can stick with the strategy and not make behavioural investing mistakes – mistakes the average equity investor is unable to avoid.

Look at the graph below. The orange bar represents the S&P 500 and the blue bar represents investors.  You can clearly see that investors are outperformed by the very market they are invested in!  This is because overall, investors make the mistake of buying high and selling low.  The graph shows that over approximately the last 30 years, the S&P has delivered annualized returns of more than 10%, with the average equity investor earning slightly below 4%.

Always remember the saying: “Time in the market always beats timing the market.”  And also this one, which is from Warren Buffett: “The stock market is a device for transferring money from the impatient to the patient.”

Despite their initial strategy of promoting passive investing – which again is fine if adhered to – the robo-advisors transitioned to encouraging their customers to buy fractional shares of unprofitable companies, bitcoin, NFTs and overall, speculate instead of invest.

No less than Mr. Buffett, by the way, said just this May that if offered all the bitcoin in the world (that bitcoin having a $700-billion market capitalization) for just $25, he would not take it.

Buffett contrasted his favourable views on farmland and rental properties vs bitcoin as “the difference between productive assets and something that depends on the next guy paying you more than the last guy got.”

What the robo-advisors have created is a whole generation of investors who’ve been taught how *not* to think about investing fundamentals.  While this story certainly reinforces the wisdom of our strategy, I still find it disappointing because it risks turning off, from investing, an entire generation.

HOW LONG DOES IT TAKE TO GET OUT OF A BEAR MARKET?

We don’t speculate on what is going to happen in the markets and when, because market timing is impossible. We do, however, look to history as a guide to what might be ahead.  As to when we will come out of this bear market, for example.

The market is down approximately 20% in 2022.  Looking at 12 bear markets since World War Two, when the market has been down 20%, it has taken an average of 25 months to return to break even.  If this 25-month timeline were to hold true on this occasion, it suggests that the market’s annualized return for next two years plus one month would be 14% per year.

Here is the good news, should that 25-month timeline come to pass:  because our equity portfolios are down less than 10% and not 20% (and our portfolios are not the market but carefully hand-picked for you) we may attain a rate of return higher than that 14%.

Note that we believe the market will improve before the economy does, because economic data reports what has already happened.  On average, in fact, equities bottom out 116 days before the economy does.

HAPPY SUMMER

Here we are in the first few days of summer, and it is shaping up to be the best one since 2019 for getting together with family and taking a break from the everyday.  On behalf of the entire team here at Marche Wealth Management, I wish you a very happy summer.

--

We don’t speak jargon.  We’re all about uncomplicating your life, so we speak plain English.  If there is someone you care about – someone who would appreciate this simple and straightforward approach – please feel free to share this message with them or put us in touch.

Want to discuss any aspect of this month’s blog, or any other issue on your mind?  Have a story idea?  I am always happy to receive your call or email.