Even when somewhat expected, a sudden and significant pullback in equity markets is not pleasant. After a prolonged period (1-2 years) of surprisingly low volatility, particularly in the US, the last couple of trading days have perhaps been an overdue reminder that volatility is inevitable in both directions at some point in time.
Nevertheless equity sell-offs, and spikes in volatility understandably take a toll on our emotions. Our Financial Plans and Investment Portfolios are after-all aligned with the personal needs and objectives that define our lives. In light of the recent market action, we wanted to reach out and provide some context.
As reported by Lori Calvasina, RBC Capital Markets Head of U.S. Equity Strategy, “it remains to be seen what the specific causes of Monday’s drop was, and who the big sellers of stocks were on the day and over the past week”. Lori makes the further point that valuations have improved dramatically “the recent price action has dramatically reduced a key risk to equity markets”.
In our last several reviews/executive summaries, we have sighted high valuations as one of the key factors motivating us to consistently take profits in our portfolios. The act of frequent rebalancing our portfolios back to the target weights for equity and fixed income have ensured that capital is protected, and appropriate risk levels are maintained. Furthermore, profit-taking and repositioning within the portfolio whether that represents buying higher-quality government-backed GICs as yields have slowly become more compelling, or geographic and sector rotation of equities to be more defensively positioned, have been positive contributors to the stability of our portfolios during the recent sell-off.
Importantly, each portfolio is anchored around a long-term Strategic Asset Allocation that is a reflection of each client’s personal circumstances and objectives, offering the optimal risk/return tradeoff. Proper planning leads to the construction of guidelines and parameters defined specifically for each client, to direct investment decisions though business and investment cycles that will inevitably generate periods of emotion and uncertainty.
It’s too early to tell if the sell-off of the last few trading days is the end of a short-term correction or not. What hasn’t materially changed is the economic backdrop that indicates recession risks remain low. That said, we have not been complacent, as evidenced by our pro-active and consistent commitment to profit taking, and preserving capital. We will continue to adhere to our discipline, taking initiative as markets adjust going forward.
Attached are some additional comments from RBC Dominion Securities’ Portfolio Advisory Group that you may find useful.
We look forward to our regular portfolio and Financial Plan reviews with you. That said, we are available for a discussion at any time you feel it is necessary. Please do not hesitate to contact us if you have additional questions or would like to discuss your investment plan.