If we haven’t had a chance to chat yet this week, you’ve now confirmed that I am still alive after having survived the Edge Walk and making it back down onto the ground safely.

 

Was it scary? Sure it is. You’re up 1,168 feet above the ground and for the first 30 seconds, you can’t help but think that your harness could be the first harness that actually malfunctions and drops you to your plunging death. BUT, once you get over that thought and trust that the harness won’t let you fall, you can literally and figuratively “let go” and enjoy the view. I have to say that I was very proud of Mark, he killed it up there and by the end said something about going sky diving for his birthday next year (between me and you I think he was on some sort of high from the experience and didn’t really mean it, but we’ll see).

 

So if told you that you could buy a market harness to keep you from falling, would you buy one?

 

First let’s talk about what’s been falling lately. Ongoing concerns regarding China’s growth and equity markets continued to agitate global markets today. The S&P 500 and the Dow Jones Industrial Average are on track to close with their sharpest weekly falls since November 2011. The Nasdaq is on track for its largest weekly decline since August 2011, and the TSX hit its lowest point year-to-date. WTI and Brent hit six-year lows with the former dipping below the $40 level for the first time.

 

While markets were roiled in North America, global concerns appear even greater, as Emerging Markets deal with the collapse in commodity prices and persistent U.S. dollar strength. The MSCI Emerging Markets Index tumbled 4% this week and is now down13x% year-to-date. Ay caramba.

 

Is it all bad? No. I wrote a note to clients earlier this afternoon outlining the good news/bad news scenario of what’s going on and the bottom line was that the sky is not falling. We believe that we are still in a long-term secular bull market, and the current pullback is a rare buying opportunity for good businesses with sustainable, superior earnings growth (my favourite sectors remain US Healthcare, US Financials and US Tech for buying opportunties). All that said, we likely aren’t at the bottom yet and it’s going to be a bumpy ride.

 

So, more about these market harnesses – they come in 3 sizes:

 

1. Principle Protected Notes
A PPN, is a structured investment product that consists of two parts:
The harness – similar to a GIC, it is an investment that promises to return to you the original amount you invested, usually after a six to ten year period.
The experience - The second part of the PPN is the upside potential of the equity market since the PPN’s performance is usually linked to a market index, a fund, or an underlying basket of equities that offers the potential – but not a guarantee – of a profit on your investment.
In other words, the PPN is a more intricate and sophisticated version of an index linked GIC – or – a way to feel like you’re jumping off the CN tower into the market with a hardness that will spring you back to where you started. PPNs and structured notes are an interesting strategy for investors to consider and understand – but they aren’t right for everyone.

 

2. Hedge Funds
I hire brilliant hedge fund managers like Dave Picton, from Picton Mahoney for example, to manage portions of my high net worth client’s portfolios when it comes to the alternative management allocation of their mandate. Picton Mahoney’s main objective is capital appreciation, downside protection and income generation – protecting your wealth by reducing risk. They do this by relying on a disciplined and repeatable investment process to maximize risk-adjusted returns and generally aim to move in the opposite direction of the market (when it’s heading south).

 

3. Strategic diversification and disciplined Asset Allocation
These two techniques combined have proven to be the most effective way to mitigate the systemic risk inherit in any market. History has shown that different asset classes, industry sectors and geographic regions generally do not move in sync with one another. Since no one can predict exactly when one type of investment will outperform the others, the most effective approach is to hold a diversified mix of investments. Diversification helps to reduce risk and smooth out returns as lower returns in one asset class or market are often offset by gains in another.