Goodbye 2018, Hello 2019!
I hope everyone had a great holiday season, and I want to wish you all a healthy and happy 2019!
For the equity markets, the last quarter of 2018 was one of the worst since 2008. We have not seen this kind of volatility in roughly ten years. Please see below for charts on returns in equity markets from around the world. In Canada, the TSX fell -11.6%, in the U.S, the S&P500 fell -6.2% and globally, the MSCI EAFE (Europe, Asia and Far East) fell -16.5%.
A few things we learned in 2018:
- You must have short term bonds in your portfolio: With interest rates rising in North America, there must be protection in your portfolio to mitigate against volatile markets. Currently, you can purchase a one year GIC at 2.60%, a laddered Canadian government bond portfolio is paying 3% and a laddered Canadian corporate bond portfolio is paying 3.1%. All of these products are good options to hedge risk in times of upheaval, however, we are still avoiding high yield debt or “junk bonds”, as the risk is too high to justify the reward.
- Be patient and hold cash: When markets go down as they did last quarter, we want to have cash to add to our favored positions. The key to having cash is continuously following our rules of rebalancing portfolios. If a stock or multiple stocks in your portfolio go up, we are going to trim them and either hold the proceeds in cash or add the proceeds to picks which we expect to increase in future.
- What is included in your fee: Investment advice is getting less expensive every year. The more fees you can keep in your pocket, the higher the returns you will have over time. What is included in your fee is also important. At RBC DS we provide our clients more than just investment advice. Each client receives a written financial plan, will, trust and estate planning. Recently, we introduce complementary banking to clients that meet a threshold of over a million dollars of investable assets.
- Good investments can go down based on external events: There will always be macroeconomic events and situations around the world which affect the bottom line for clients. Sometimes, as in 2018, events such as these heavily influence the equity and fixed income markets, and sometimes, as in 2017, they have a fairly insignificant effect. For example, look at a company like Honeywell. They are one of the world’s best run companies with great fundamentals, however, in 2018, they were down -10% even after declaring record profit, raising their dividend and buying back millions of shares. When a company like Honeywell declines due to external events, we don't get worried and sell, we buy more. On the flip side, you have companies like Advanced Micro Devices. We added a 2.5% weighting early last year, when they were trading around $12. By mid-year, the stock rose to $30 and was very expensive. The risk to reward for the company grew tremendously with the price increase, causing us to sell half the shares in early July. In September, they announced a slowdown in business and the stock fell to $20. We then exited the stock completely. I believe active management on a company like AMD is necessary in responding to the influence of macroeconomic events. With a company like Honeywell, such active management in response to external events is largely unnecessary.
Where are we going?
The predictions of the top 16 strategists in North American are calling for the S&P500 to finish the year at roughly 3,052. That would be a gain of 22% from where we are currently. Does this mean we will get there? We don't know. The same strategists did not believe the S&P500 would finish negative in 2018, and no one predicted the Great Recession of 2008. I believe we cannot gauge where the markets will finish each year, but rather, we must find investments with quality fundamentals that will grow over the next five to ten years. As we head into a new year, it is a great time to sit down and look at your current investment portfolio. Do you believe your portfolio can hold up in a recession? Do you believe you are getting the best advice possible? If not, I would love to sit down and discuss our investment and wealth management planning process with you.
As always, if you have any questions please feel free to contact me directly at 604-257-3225.
Kyle G. Sarai, MBA