As you probably know, we have been talking about and preparing for a possible correction for a few quarters now and are not necessarily shocked by the pull back.

 

While the exact timing and magnitude can never be foreseen, and despite many ongoing positives (earnings, tax reform, various economic indicators), some warning signs were starting to build. 

 

As a quick recap, here a few of the techniques we have been deploying to mitigate (but not necessarily totally eliminate) volatility and downside risk in client portfolios:

 

1. Rebalancing overweight positions down to target weight;
2. Selling some of the lowest conviction holdings;
3. Holding higher than normal cash balances;
4. For new clients, holding off on initiating some positions;
5. Holding US dollars (often does well in times of crisis);
6. Where possible, we used US S&P500 protective put options to deflect market drops (like fire insurance….as described in our last couple of strategy updates);
7. Holding a large percentage of Canadian and US Equities that have lower expected market risk to their respective indexes like the Toronto Stock Exchange or the US S&P500;
8. For some companies that we have sold that fell out of our buy or hold parameters, we have not replaced them as of yet to keep our cash position even higher.

 

For those of you are interested in more detail, I have attached the following article put out by our Portfolio Advisory Group which provides a good high level overview of the market correction.  (Link - Volatility is Back)

 

In our last strategy update, we had said that we had expected 2 to 3 interest rate hikes in the United States in 2018. Due to the increased employment numbers and economic activity in the US there are people now anticipating an additional two maybe three rate hikes which has negatively impacted the bond markets and in turn negatively impacted the equity markets.

 

One other thing I mentioned in the last strategy update is to expect increased market volatility. For a couple of years we've had unusually tranquil markets and particularly in the last short while we haven't had a market correction. So this pullback is of no great surprise, we just didn't know when exactly it was going to happen or what the catalyst was to cause it.  Market corrections are a normal course of investing in both bond markets and equity markets.

 

The good news is that we believe that things will eventually settle down and we think it may produce some good buying opportunities, which have been hard to come by recently. Everyone should understand however, that some volatility is normal and we expect that to remain elevated going forward. In other words, the lull of 2017 was highly unusual, but so is daily 1,000 point drops on the DJIA – somewhere in the middle would be more normal.

 

In the meantime, we will stick to our processes and remain vigilant. We have a disciplined Canadian and US equity process that we are monitoring and will buy, sell or hold positions as the current market conditions dictate. 

 

We wish all of the very best to all of our supporters and please feel free to contact us anytime with any questions or concerns.  

 

 

Dan, Chris & Jessi