April 2016 SWM Letter

Despite a persistent chill in the air, springtime is coming and this season will unveil its beauty for us.   Investments too are shedding their winter blahs.  Results of the past month are now positive.  A client recently voiced a question that is surely on many peoples’ minds, “what is our outlook going forward?”  So we’ll continue this theme in a moment.  A picture in my March letter fits with what I share here today.  You could say these two pictures offer something of a “crystal ball outlook” as 2016 moves ahead this year and beyond.

First – a quick touch on:

NEW GRADUATES, YOUNG ADULTS.  Pic _ wonderingThere’s a time of life when you don’t have a million dollars (or even a fraction of it) but you can build powerful habits worth immensely more.  For guidance on this theme – especially on “debts”, “savings”, and building your financial future, visit Young Want Financial Planning.

PENSIONS / CAREER & BUSINESS.  It’s a good time to ask, “How do I make the right decisions about my pension?”  Others are wondering, “How can I get more as I exit my career …or sell a business?”   We can review chapters 1 and 2 of my 2013 book, A Lifetime Of Wealth (have me send you a copy).  More specifically let’s get together as soon as possible to discuss your plans, and we’ll focus on how you want to be enjoying life now and in all that life brings.

Skip this unless you have a personal interest, but some are especially worried about pension plans.  Some are strong, as Aon Hewitt reports 8% of pensions have a surplus.  Yet today, pensions’ median solvency ratio is just 83%.  Deposits and returns have failed to bridge the gap in such pension plans.  Where plans are underfunded and outflows exceed assets and growth, pensioners will be forced to take cuts.  Possible solutions include our own mandates for dividend-income, infrastructure, real estate, and broader reach into global markets.  Some pensions also hold private equity though there is risk to such illiquid assets.  A recent alternative is where some pensions are contracting with insurance companies using life annuities.  The difference in our personal investing is to gain higher life-annuity income after age 70 (or in a life-annuity “ladder” in stages from age 68 to 78 …see Annuities).

WILLS / POAs / FAMILY ESTATE.   We all have times when a family has to discuss estate planning, such as getting Wills, confirming personal health decisions, and how to protect family cottages, businesses, & other assets.  The first Pic __ Grandchildrenstep should focus on personal “values” such as your feelings about certain assets and family inheritance.   There is also tax- and financial-planning, with various solutions to consider.

For example, estate gifts can trigger tax, probate, and legal costs.  Some families ignore the problem, so heirs lose the gift or are forced to borrow and pay interest over and above the initial costs.  Saving a deposit in advance can cost much less.  Strategies with estate insurance can further reduce the cost and bother.  Warmer months are a common time for families to touch these discussions, reviewing what family gifts one has in mind, and how to best settle the costs.

Investments:  Going Forward…

Investment markets dropped 10% worldwide as 2016 opened (25% drop since last April).  Springtime now treats us to reports of stronger-than-expected earnings, employment, and exports.  Canada’s TSX is up near 3%, the U.S. is up 1%, while much of Asia, Europe, and Latin America remain under water.  Madrid is recently down 7% and Mexico up 7%.  Shanghai down 15% and Russia up 15%.  You don’t have to remember these numbers because they change daily.  What you really want to know is if we’re gaining altitude and speed in 2016.

Last year in April was the peak from which markets fell so precipitously.  Investors who aim to mirror the market index would have lost about 25%.  Our own results were far safer because our mandates for life income are far less volatile, established in dividends, infrastructure, and real estate.

Now as we’ve passed April 1st we want a glimpse of what’s coming next.   If there were a crystal ball to let you see the coming years, that’s exactly what people would want to see today.  So what can we find as a crystal ball?

It comes in two pieces.   One is the stock-channel pictured in last month’s letter.  95% of all market fluctuation occurs within that channel.  When markets drop below the channel, they inevitably rise again to get inside it, and will eventually pierce the upper boundary – this is a mathematical and historical certainty.  If the TSX (Canada’s market) today is near 13,350 and the pictured channel ranges 13,800 to 20,600 you sense the destiny that values ultimately will rise.  With 2017 range from 14,600 to 22,000 we’re leaning toward significant growth over the years ahead.

The other half of this crystal ball is an Expectations-Model which looks a bit like the reverse of a stock index.  When markets rise and the index goes up, this Expectations Model can fall.  When markets fall this Expectations Model can rise.  Three dynamics matter most.  First is “earnings”.  If these are trending upward, results may be positive.  Second is “valuations.  In a fickle world valuations rise and fall.  In 2015 for instance, valuations trended downward even for high-income assets like banks, real estate and infrastructure.  This is why strong assets yielding 4% to 7% could drop in market value.  In time these assets can also attract higher valuations and thus reward patient investors.  Clearly the third dynamic is time”.   While any period may rise or fall, the real impact is evident over periods of time such as 3, 5, 7 years.

The picture here focuses on Infrastructure but is also relevant for real estate income and blue-chip dividends.  When markets were higher, expectations slid because there was risk that earnings and/or valuations could recede.  With markets recently lower, rising earnings and recovering valuations suggest resplendent rewards now over the next five years. *

Pic _ INFRASTRUCTURE EXPECTED RETURNS

* Imagine an asset can earn or pay you $1/year.  How much are you willing to pay for such an asset?   Would you pay $4, or $8, even $15 or $20?  Consider also if the asset is paying you $1/year now and increasing this payment yearly.  Market history shows that people sometimes buy at 15-times-earnings,  or 30x, or 9x.   Today we have rich assets with low valuation, and over time they will be valued more highly.  If valuations move from 9 to 12, and if earnings move from $1 to $1.20, the expected growth for such period of time could be 60%.  As we saw after 2003 such growth can occur rapidly.

Are earnings guaranteed to keep rising?  Are valuations certain to rise?  Nothing is carved in stone – especially in a given month or quarter.  Among global mandates that increase earnings and expand valuations, our trend is bound to move upward.

April and onwards . . .

Our world today remains in a gradual recovery.  Earnings, exports, employment, expanding valuations, especially encourage our earnest expectations.

Good health and happiness to you each day, and please reach me directly with any questions!

Yours in Financial Security for LIFE!

Brian

Brian Weatherdon, MA. CFP. CLU. CPCA. CRC. MDRT.  905-637-3500 x 223
627 Guelph Line, Burlington, Ontario. L7R 3M7.   1-877-937-3500 FREE x 223
Brian@SovereignWealth.ca 
Ret.Coach SEALAmazon (2013): “A Lifetime Of Wealth — And How Not To Lose It.”
Amazon (2015):   Your Business, Your Retirement: Halton Retirement Study.
 
** This monthly letter touches on key strategies in Canadian and global investing and financial planning. This letter is not an offer to sell any kind of security, insurance, or program. Historical returns and risk measures are not a valid guide to future performance. For information on near 10,000 investment funds and other financial structures please feel free to contact me directly. Returns shown are from Morningstar and other major financial news media. Research is sourced from leading sources including GLC, RBC, CIBC, Franklin Templeton, Mackenzie, and a wide range of highly reputed firms. Opinions reflected in this letter belong solely to the author and no other body is responsible for the content expressed here. We value opportunity to serve alongside your legal and accounting advisors with whom we can best protect your financial security and advance your goals. We are grateful always to receive your comments and questions.

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