I had a question from a client yesterday that brought on a good conversation.

The question was: if we saw this situation coming, why didn’t we move more funds to cash: In November, in January, or even now?

Great question. First off- I’m not sure anyone saw all aspects of this situation coming. We knew there would be volatility and that the trade relationship with Canada would be in the crosshairs, but the overwhelming opinion was that Tariffs were a negotiating tool and didn’t make sense. They would be a threat, or a temporary tool but not long term. The jury is still out as to what they think it is with arguments both ways.

But first, let me explain why we sometimes increase our cash position. We will do this and lower our equity allocation at different times in the market cycle when we see stocks coming to an end of their run. It can be when we see the economy slowing and signs pointing to it slipping into recession, or stock valuations are high, but looking back pre and post US election, signs were pointing to (and continue to point to) an expanding US economy. At the same time, we saw volatility ahead. Stock valuations were high- mostly in tech, but still high. Then, we add in what is clearly an unpredictable US administration. So, a green light, a yellow light, and a red light… or maybe green and two yellows.

We therefore took what we refer to as a neutral target weighting for equity. For a balanced investor, that’s 60% equity/40% fixed income. For growth, it’s 80% equity, 20% fixed income- For an all equity portfolio, it’s still 100% equity.

If we saw a recession on the horizon, unemployment going up, interest rates set to rise and high stock valuations, then I would reduce the equity in the models by 5% to 10% and hold cash in its place. If we were at a position where the market had dropped significantly, a recession showing signs of ending, unemployment falling and valuations low, then I would overweight equity and go 5% – 10% above target. But where we are with so much uncertainty, then the correct approach is target weight.

In an aggressive / all-equity portfolio the value of the portfolio is going to go down if the market goes down. That’s normal and should be expected. The strategy is to outperform on a relative basis- if the market drops 15% and we drop 12%, that’s good. A mix of defensive and offensive stocks is important to do that, and as we see things change, or possibly improve, we shift out of some of the defensive positions to more offense. You are taking advantage of companies that are in a relatively higher position, buying into those in a relatively lower position. A few weeks ago I adjusted the holdings- I split CNQ and CM in half and bought SLF. That was for defense, and was a good trade.

Right now, it’s about risk management.

Even today the language is changing on the Tariffs. The US is reportedly coming out with an amount or an issue, and if the they feel it’s satisfied, they will lift tariffs on those nations. No one really knows what that means, but it looks to be very subjective. The US could decide to lift tariffs on Canada in April. If they do, Markets go up. If they don’t, markets go down. Or if they do but put them back on in May, it’s a yo-yo. Though this is a softening of the language, we do not expect the situation to change for Canada. Indications are that sales tax on US goods is part of their calculation. But again, if markets decline and pressure builds on the US to end this, then they may change their mind.

There is no predicting what is going to happen in the short term. Anyone that claims to know and is trying to take advantage of a perceived scenario is lying and speculating. We don’t speculate. We focus on the belief that the market will recover as it always has. We keep your target allocation, rebalance quarterly, and when this passes and the market recovers, you will be ahead.

Rob.