Investing Discipline

Dec 10, 2018 | Kyle Sarai


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cid:image001.png@01D3E21D.33BD2880December is one of the busiest and most exciting times of the year for our team! We hold our annual client dinner, and this year we are pleased to have Fidelity Investments present an independent prospective on their thoughts going into 2019. This is by far my favorite event of the year, as it is an intimate dinner specifically for my clients, where I am able to catch up with everyone and answer any additional questions they may have.

In addition to our client dinner, December is the time for scheduling annual and semi-annual reviews to make any necessary adjustments to client portfolios. In response to the increased volatility as of late, our internal Portfolio Advisory Group has made a few changes to our Canadian and U.S model portfolios over the past few weeks and updated our asset allocation models. We are slowly further minimizing risk in our models and monitoring our asset allocation on a monthly basis. One question I get asked from prospective clients is “what rate of return do you expect over the next 1, 3 & 5 years”. My answer is always 'I don't know', and the truth is, no one does. What I can provide is the best research we have, and the resulting predictions of some major investment firms regarding expected returns for the S&P500. Please see below:

S&P500 – December 7th: 2700

  1. RBC (Target 2,900; 7.4% predicted return) - The economy itself is currently quite strong. But investors have been preoccupied with the idea that it is 'late cycle'.

  2. Morgan Stanley (Target: 2,750; 1.85% predicted return) – Beware tightening financial conditions and decelerating growth.

  3. Bank of America (Target: 2,900; 7.4% predicted return) – 'Wildcards' will make for more volatility.

  4. Goldman Sachs (Target: 3,000; 11.11% predicted return) – Get defensive.

Back in February of this year, the Dow Jones Industrial Average lost 1,032 points in a single day. The media hyped it as the largest decline on record, which was misleading. Yes, it was the largest point decline, but not the largest one-day percentage decline. Sensationalized new stories about market corrections are my biggest pet peeve about market reports, and we have got to break our addiction to watching and reporting point moves in the Dow and other indices. We are less than a month away from the end of the year, and the majority of stock markets around the world are reporting negative numbers for the year. As of today in Canada, we are down -7.4% and, in the U.S, the S&P500 is basically flat. In 2018, we saw two 10% corrections in the S&P500-something which has not happened since 1963. It can be tremendously nerve wracking and uncomfortable for clients to get through these downturns in the market, made all the more difficult by news reports which often over-exaggerate the significance of what are usually minor and necessary corrections. For your peace of mind, I have provided a chart below showing all of the incidences over the past ten years where the media has claimed the start of a recession but there has been no subsequent recession.

In conclusion, investing is not easy. My job is to block out the noise, look at the bigger picture and put these corrections into perspective for my clients to help them make rational decisions. Our portfolios take into account these corrections and are prepared for them. As conditions change, we adjust to meet the new challenges the market throws at us. We do not know when the next recession will happen, but we are ready for it.

If you are not happy with your current investment or wealth plan please feel free to contact me directly at 604-257-3225 or
kyle.sarai@rbc.com.

Kyle G. Sarai, MBA