October 2018 SWM Letter – Safe Through Every Storm

When travelling, maps are a great value – especially if they show “you are here” ... which we’ll discuss in a moment.  Maps may miss new traffic and weather patterns, a river which shifted course or a new building, so there’s a real way in which “no one has exactly been in this very spot before”.  An experienced guide helps manage the journey so you can reach your destination safely.  The same is true in managing your financial journey.  As you appreciate, we continue our focus to safeguard your wealth, lifestyle and wellbeing through all seasons to come.

Two Types of Map.

Two types of map come to mind which indicate our current location and the way forward.  One compares times when U.S.A. has advanced or fallen compared to the rest of the world.  In this picture from Thomson Reuters you’ll see how the U.S. markets cycled lower in 1976-1988,  then higher to year-2000,  then lower to 2008, and more strongly to the present time.  Such periods don’t have a predictable limit, and momentum may continue until the bubble bursts.  While impossible to say when a new direction will start, the changeover becomes inevitable and we certainly aim to be on the right side of this.  (Attached picture:  US relative to International.)

A second map is this “fair valuation” model as I’ve often shared with you.  Like a hiking trail, markets usually remain between the lines, stepping beyond only 5% of the time.  In year-2000 the U.S. was vastly overvalued which led to ten years of profound losses, then eight years of recovery, with a modest 3.4% average growth since Y2K.  Canada’s market looked similar in 2000 due to Nortel which was 35% of the entire Canadian marketplace (like FAANGs today).  Canada surged forward in 2003-2008 and 2009-2015.   U.S.A. markets are becoming comparatively vulnerable, and both maps suggest Canadian markets (also European and Emerging economies) will have a greater opportunity to lead higher.  (Attached picture: equilibrium / fair valuation.)

Hiking in nature or the local shopping mall, you’ve seen a sign, “YOU ARE HERE”.   That’s what Sept 30th statements show.  Third-quarter results were meagre across the board:  US, Canada, World, even Bonds – all down a bit.  Year-to-date results also look poor because 2018 opened with a sharp 10-15% drop fuelled by worries on trade, tariffs, N. Korea, interest rates, Trump’s tweets, and more.   8-month results have been positive, and 12-months have been profitable.  (NB:  as you’re reading this on or near Oct 15th, this season's drop typically sets the base for a Santa Claus rally in November/December.)

YOU ARE HERE shows we weathered the storm earlier this year.  Our portfolios are designed to smooth unwanted risks and achieve market growth over the coming horizons: 1, 3, 5, 10 years forward.

QUESTIONS PEOPLE HAVE ASKED.

Are we in a bubble – when will it burst, and how will it hurt us?   This arises whenever news media get frothy and people worry about collapse.  So you want to know what are the two main definitions of an investment bubble:  (1)  a major “gap between price and value” as in picture #2 which shows more danger for U.S. than Canada (also Europe and Emerging markets),  or (2) whenever prices fall 20-50% as in year 2000, also with commodities in 2007, financials in 2008-2009, and someday when the more aggressive FAANG stocks (up to 600x earnings) go “pop”.  If we’re reviewing Canada’s market behaviour for the year ahead, RBC-GAM research puts our market range between 14,500 to 22,000, so perhaps it's safe to expect 6-8%.  Picture #1 above concurs in suggesting stronger growth for non-U.S. markets over the next 8-10 years.

What geographic allocations are we currently holding, and why?  Our accounts generally have 15-30% in the U.S., not in high-growth, high-risk stocks but to add diversification in what remains a vital economy in our world.   We also hold Canada, Europe, Emerging Markets.  Consider the price one pays to invest in such markets.  US price (average) is 22x earnings.  Canada is 15x earnings;  Europe is 13x, Emerging Markets at 11x.  We don’t want to own the highest price but a strong position for future growth at reduced risk.  Canada, Europe, and EM today are in many respects better value, higher dividend, more growth potential, and positioned for less risk.   Consider for example European markets:  they’ve lagged for a decade and sit at a 22-month low, whereas U.S. is now priced near an all-time high.

Do certain sectors profile strongly in our accounts, and why?  People have asked of our exposure to Cannabis ("pot-coms"), also FAANGs & social media, renewable energy & green technology, innovation like Uber & Tesla etc.  We shy away from popular fads with low/zero earnings and no-dividends.  “Value” and “growth at a reasonable price” is a safer win as cycles shift.  So I repeat as always, there is deeper value and safety to own Global and Canadian Dividends, Real Estate, Infrastructure, with fixed income to complete your "Life Income Mandates".  This helps to avoid losing your money, and gains well over most time periods.  While our investments include ten or more sectors, we usually have more Financials, Real Estate and Infrastructure because this reduces costs and risks, while increasing both yield and safety.

ECHO OF MARK TWAIN?

Mark Twain offered many intriguing descriptions of humanity and the world in which we live.  Example:  “A man who carries a cat by the tail learns something he can learn in no other way.”   Similarly, the story of a turtle who carried the scorpion over a river.  Point being, it is the nature of investment markets to fluctuate wildly, sting and scratch on occasion.  We therefore don't invest in the whole market – and we won't measure ourselves by market excesses but rather prefer healthy assets which the market has undervalued.  This has provided strong growth while protecting the downside.  It preserves savings, perpetuates growth, and pays well over the decades to come.

I’ve seen such markets before and we'll continue to protect wealth and life-income … regardless what troubles may be in the daily news.  Our planning didn’t appear over any brief period but with reference to key and lasting mandates that have been solid and profitable for decades – indeed for centuries.  They will continue to protect the way for years ahead.

BONUS POINTS.

Any questions, reach me directly:  make us your first call.  All the time people ask our help to get clearer on tough personal and financial matters such as family estate, Wills/POAs, inter-generational wealth, holding assets in a business, tax and income-splitting, long term care planning for self or aging parents, even how to move senior family in later stages of life’s journey.  What is most in mind for you and your family these days?

Many ask since a diagnosis I mentioned a year ago (#MDS).  Our staff has continued and will always maintain our service promises to you and your dear ones.  My health and daily experience have greatly improved, and as needed there will be further updates.  My reason to be transparent is because I believe that's best for everyone, and also to affirm two things that are very important in your very own planning, today and for your future.

As people age, more health conditions arise:  by age 70 the average person has up to 3 health conditions – all of which will be managed and some of which create a new level of expenses.  My critical illness insurance paid me fully in 2017, more than enough to cover ongoing meds and supplements, also to enhance our travels.  Providing for a future illness may (or not) require insuring -- that's your decision to make -- but insurance is appealing because it pays “when you need it most.”  In your financial plan we review future health and comfort, and how you’ll finance whether by insuring, saving more, or downsizing a home.

Always feel free to share this letter when it can help a friend or neighbour, or ease the concerns or questions of someone you know.  Introduce us -- let us help.

Yours in Financial Security for LIFE!

Brian Weatherdon, MA, CFP, CLU, CPCA. 905-637-3500

627 Guelph Line, Burlington, Ont. L7R 3M7.  1-877-937-3500

Brian@SovereignWealth.ca

Author:  A Lifetime Of Wealth — And How Not To Lose It  (2013). Protecting Life, Loved Ones, and Future Dreams  (2013). Your Business, Your Retirement: Halton Retirement Study (2015) .

** 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. Returns are from publicly available sources and research from a variety of firms including but not limited to GLC, RBC, CIBC, Mackenzie, Franklin Templeton.  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 consult alongside your legal and accounting firms to advance your financial security and unique goals. We are grateful always to receive your comments and questions.

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