Last month, I outlined our portfolio position in the equity and fixed income markets, followed by our position going forward, should a correction or recession occur. Again, one never knows exactly when the markets will turn positive or negative, but preparing a portfolio for any market condition is the prudent approach to investing. As Mike Tyson once said, “everyone has a plan 'til they get punched in the mouth”. Over the past three weeks, it feels like we have not only been punched in the mouth but knocked out in the first round. As of March 9, the S&P500 was down -18% from its all-time high on February 17th. We have not seen down days like this since 2008. Many investors are solely blaming the coronavirus pandemic, however I do not personally believe this pullback was exclusively caused by the coronavirus. The fuel for this fire was already present and coronavirus was just the match. The fundamentals of this bull market have been getting progressively weaker over the past few months, fueled by 'irrational exuberance' due to low interests rates and high levels of corporate debt.
How Did We Prepare?
As I have written in previous newsletters, we have been investing cautiously in the global equity and fixed income markets for the past 11 months, as indicators of a looming recession have been steadily mounting. Last April, I wrote about the inversion of the yield curve in Canada & the U.S. Throughout the fall, I reiterated our plan to decrease clients' exposure to equities and move them into lower risk assets. If you were an investor with a 10-year plus time horizon to retirement, your equity exposure would have been approximately 75% last April. Today, your exposure to equities is around 50% or less, with a 5-8% weighting of gold. The remaining allocation went to mid-to-long term government bonds, with a smaller weighting of corporate credit. These changes were made in the last quarter of 2019. We knew it was a bit early to begin preparing clients' portfolios for a downturn, however it is impossible to time the market, and in this game, it's better to be safe than sorry. If you are interested in reading any of my previous newsletters from the past year, please click on the link below.
Where Are We Going?
Delivering negative news about the markets is never fun, and preparing clients for it is not either; however it is absolutely necessary if one is to preserve wealth in the long term. At heart, I am a market bull and believe in owning high quality companies over the long term. I have a passion for investing and love watching my clients reap the rewards of their investments over their lifetime. Investing helps them to achieve some of their most important life goals, such as providing for their retirement, sending their children or grandchildren to school, or allowing them to purchase a home.
As of right now, we need to trust our economic data indicators and where we are in the economic cycle. Where we are is in the contraction phase, and we have been advised by our chief investment strategist, Jim Allworth, to expect lower averages of return. The keyword here is 'cycle', a term which carries the notion of impermanence, and promises that this, too, shall pass. The key to weathering the storm has always been to have a secure financial plan in place to help with your asset allocation, and a diversified and well-balanced portfolio meant to survive the extreme ups and downs of turbulent markets. One thing we can be sure of, is that we will continue to see extreme ups and downs for the immediate future.
Kyle Sarai, MBA