YOU’RE AHEAD OF SCHEDULE

The markets have been turbulent, but here is a silver lining: despite the markets being in approximately the same place they were last year, our clients’ financial plans are exceeding their targets, given that most of our equity investors have experienced double-digit returns in four of the past five years.

If you are a client of ours, this is the message I have been or will be sharing with you, in the regular rounds of phone calls and meetings we conduct.

The fact is this: as of year-end 2022, we have delivered above-average returns to our clients’ portfolios for five consecutive years. In other words, we have outperformed the market. And, we expect this year to be positive. We understand that the volatility in the markets can be unsettling, and September was the worst month this year. The S&P 500, which we consider the authoritative indicator of how the markets are doing, was down 5% in September and is down 10% since the beginning of 2022.

But: this downturn in the market is completely normal, and in fact, we are always positioned to take advantage of volatile market conditions, which we are doing now in two primary ways. In short, we are locking in higher bond yields and higher dividend yields, the former with zero risk. Thus, overall, our expected rate of return moving forward is higher, with less risk.

Buying more bonds and GICs

Bonds and GICs are now a better buy than at any time since the 2008 financial crisis; this is because of high interest rates. So, we have been increasing our clients’ allocation of these instruments and own more bonds now, as a percentage of our portfolios, than at any time in the past 15 years. Many of these bonds are paying between 5 and 6%, giving us a rate of return that aligns with our clients’ retirement plan targets - with no risk. Consider that two years ago, those same bonds were paying just 1.5% to 2%.

Also consider that in a theoretical balanced portfolio comprised of 50% stocks and 50% bonds, half of that portfolio is earning approximately triple what it was just two years ago.

It is important to note that for clients with longer time horizons, especially in taxable accounts, we still prefer equities over bonds and GICs, especially equities that pay dividends and have the ability to grow those dividends over time.

Buying more dividend stocks

Our equity philosophy is to own predominantly dividend paying companies that:

-Have a track record of creating shareholder value

-Have management that treats shareholders as partners

-Are trading below intrinsic value

-Are in regulated industries

-Have a simple, easy to understand business model

However, given the rise in interest rates, dividend payments are less attractive when compared to bonds as in previous years. Although this weakness has been a drag on our performance this year, we still believe the best strategy going forward is to own companies that can grow their dividends over time.

We note that over the long run, the majority of gains from investing in the stock markets come from dividends, and not growth in share prices. For example, if a person in 1960 had invested $10,000 in the S&P 500, it would be worth more than $4-million now, with more than 80 per cent of that gain from dividends (assuming all dividends were reinvested) and 20 per cent from capital gains.

The bottom line is this: among bonds, GICs and dividend stocks, we believe there are currently a number of very good opportunities to lock in strong future returns - the best we have had since the financial crisis. We are buying accordingly, we expect above average rates of return moving forward, and our clients’ financial and retirement plans remain ahead of target.

A SEPTEMBER SAG

It’s no surprise that September was a down month. In fact, it is historically the S&P 500’s worst performing month of the year. Since 1945, the S&P 500 and its predecessor index have lost an average of 0.73% in the back-to-school month. The good news is that after a drop of 1% or more in August and September, the S&P 500 tends to rebound in October and perform well in the fourth quarter.

Here are the S&P’s last four Septembers:

And here are the most recent Q4s:

THE BANKS WILL BE BACK

The biggest laggards in our portfolios have been the Canadian banks. Why? Because they are experiencing temporary challenges from exposure to the domestic housing market and high interest rates, two closely related issues.

Increases in banks’ profits have not been able to keep up with interest rate increases; that is one cause of stock price underperformance among the Big Five banks.

Banks generate profit on loans by borrowing funds at short term rates and lending them to clients at longer term rates. The current environment, where the Bank of Canada has pushed short term rates higher but longer term rates have barely budged, has detracted from profit growth. The end of rate hikes should prove a catalyst for higher bank stock prices.

THANK YOU!

We have received many referrals this year. Thank you for your continued trust and confidence. Do you know someone - or a business, or a charity - who is wondering whether their investment strategy is still the right one, or how they could be doing better? Those are exactly the reasons for many of the referrals we receive: people wondering if their advisor is getting them the best possible returns.

This year we have experienced a particular uptick in calls about GICs and fixed income strategies - from people wondering what the best strategy is in this high interest rate environment. The fact is, because interest rates had been so low for so long, the rise in interest rates has introduced a new asset class to many investors.

There is a very good chance we can do better for them. As noted above, our fixed income strategy has outperformed the markets for the past five consecutive years, and RBC gives us access to the largest bond inventory in Canada. We would welcome an introduction from you, and would provide a completely confidential, complimentary and no-obligation review.

WHAT IF TRUMP WINS?

What will happen to the markets if Trump wins the presidency next November?

We know this is a question on people’s minds, but we are not very concerned with it - because the primary determinant of how our portfolios perform is not who’s occupying the White House, but the quality of the companies we own (see my blog post here on this subject).

As this graph shows, the S&P 500 index doesn't really care if a president is a Democrat or a Republican. The index keeps marching higher, regardless of who is in the White House.

The bottom line? Our long-time investing strategy will not change next November, regardless of who wins.

A GREAT TIME

I think that when we look back a few years from now, we will see this as a time of great opportunity. I expect that interest rates will go lower next year, which suggests that the asset prices will go up. Related, and as discussed above, current interest rates make bonds, GICs and certain dividend stocks attractively priced. Now, therefore, is an excellent time to invest. If you would like to discuss these opportunities further, please contact me for a discussion.

Happy fall!

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We don’t speak jargon. We’re all about uncomplicating your life, so we speak plain English. If there is someone you care about – someone who would appreciate this simple and straightforward approach – please feel free to share this message with them or put us in touch.

Want to discuss any aspect of this month’s blog, or any other issue on your mind? Have a story idea? I am always happy to receive your call or email.

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