October 2015 Sovereign Wealth Letter

Here we are between summer and Christmas.  We’ve celebrated Thanksgiving and soon will be in Remembrance.  It’s a season of colour all around us …plus next week’s federal election which adds to the contest between blue, red, orange, and green.  I know some of you have already voted:  please do vote!  For all of us, and remembering those who lived and died for this privilege, be sure to vote.

There is another thing about this season now in mid-October.  It’s not just the shift of weather but also the shift of markets from the fluctuations of spring and summer to the sustained growth that generally arises in the cooler seasons.  It's often true that fruit grows best in summer, stocks grow best in winter.  That’s not a hardened principle yet history supports this theme, especially coming off the tumult evidenced in recent quarters.  In fact the months from October to June often provide 60% to 120% of a year’s market-growth.   Thus we have reason to anticipate gains as our investments move ahead into 2016.

Going forward in October 2015 ff.

A “picture” in a moment here is something you’ve probably never seen before.  News media never show this.  BNN and CNBC never give a picture like this.  They’d rather harp on stock markets flailing or anything that would “juice up” emotional reaction to their broadcasts.  So everyone knows stock markets rise, fall, rise, fall;  they’ve done that for 400 years.  Over time like using a yo-yo while climbing stairs, it inevitably rises over time.  But what is the greater truth we have been sharing with “Life Income Mandates”?  

The greater truth comes from focusing on “Income” and this works because we build client portfolios to inevitably attract income year after year, every season!   We draw income in Canada and globally from a variety of sources as you know, including dividends, real estate, infrastructure, and fixed-income (cash/bonds).  So what does this really look like?    Pic _ Gross Portfolio Yield _sampleHere it is in a quick picture …and then I’ll share a brief story of what this means for us.

In 2008 and 2009 world markets fell 55% to 80% depending on where and how one measured such events.  None of our clients experienced such drop, but raw markets took such a vast tumble which was the worst since 1939 or even 1820.  Now the picture here doesn’t show that;  it’s showing the INCOME coming into a specific fund that our clients would have owned through that period.  Long term average income of this type of fund is near 5% annually plus capital growth.   But when markets fell >50% the income yield on this fund rose from 5% to near 16%.  When news broadcasters told people to be scared of risky markets, the INCOME YIELD was as high as it could be.  And frankly, who would want to sell that off?   Selling would mean losing the income.  It would also forfeit the capital growth or recovery of wider markets.  So examine this picture and then let’s suggest a story…

In our story we’ll imagine Beth and Bob owning two stocks for the past few decades:  Royal Bank and CN Rail (inherited from great-grandparents Jim and May which you can recall from an earlier 1920 story).  In the global meltdown of 2008-2009, RBC fell from $65 to $25/share and CN Rail went from $15 to $10/share.  If Bob and Beth owned equal amounts in both stocks their investment statements showed a 50% loss.  So a lot of people would have said to sell everything!  But Beth and Bob also knew their income yield had risen from 3% to 7%, and over time this would push values higher again.  What was most effective was the promise of owning investments that pay perpetual income and keep increasing this income over the years.

This is how Life Income Mandates really secure our future.  Far broader (and less risky) than the two stocks mentioned above, we focus on gathering income globally from dividends, real estate, infrastructure, and fixed-income.  This never drops as far as stock markets, but will steadily endure to provide an income.  …with the caveat that approaching retirement we must ensure a healthy reservoir to support withdrawals you’re taking out for living expenses.

Further notes for deeper readers:

Q.3 was a tough quarter world-wide:  we now understand that the recession is “dead” but engines are still lagging in first gear.  Governments everywhere are hoping consumers will spend money to drive a more vibrant economy.  But these consumers are cautiously reducing debt (and aging) so it’s a slow process to generate more strength and resilience in our Canadian and world economy.

“Value hasn’t been given due value” this year.  Banks and infrastructure holdings dropped 5% to 15% despite the rising income they continue to generate.  A drug company with no earnings has skyrocketed while strong income-payers slipped behind.   Toronto's exchange now yields 3.2% instead of its normal 2.4% …and client plans by comparison today are yielding 4% or higher. 

So today we’re rising into Q.4 which is historically a strong season for growth, and "value" will again be recognized for its true and lasting worth.  U.S. numbers are lifting beyond what most conceived a few months ago.  China is opening levers to reach its 7% official growth target this year (even if the truth is nearer 5%).  Europe has settled many key issues, including its hard-line on Greece (which really isn’t about Greece but as a proxy battle against potential defaults in Spain and Italy).  While early 2015 drove Canada into recession with a hard-winter and weak commodity prices, economic growth resumed in the summer so that markets and client portfolios are now rising.

Pic _ metaphor Oct2015

Daily noise in the markets may continue a few more weeks but October usually leads to 6-8 months of strength.   This is where volatility becomes a “good thing” because “change” logically includes upward momentum as well.  Here is a chart you may never have seen before which suggests what comes after times of extreme volatility.  Click on (chart)  and then click on three tabs to compare: the 1-year, 5-year, and maximum time periods.  In the 1-year picture we see volatility is now down into a safe zone where markets can rise more confidently.  In the 5-year picture we see even greater volatility in 2012 which was precursor to high-growth in 2013-2014.   Volatility VIX 1990 to presentIn the ‘maximum’ period we see volatility of 2008-2009 that exceeded anything since before we were born.  Here is the VIX (volatility-index) since 1990.  The recent decline of measured volatility aligns with markets turning upward in the past few weeks.

So in all seasons we keep our focus on Income, reducing risks and enjoying growth over time to support lifestyle, comfort, and loved ones.  Your plan goes forward a year, five years, ten and 20+ years to support life and loved ones through all seasons.  Our summer-2016 forecasts (RBC slide in last month’s letter) reveal how cooler seasons that are now upon us can bring significant growth.  I am personally confident and fully invested in our successful results over the coming seasons.

Closing notes:

As a favour to yourself and others please take a moment to answer a few vital questions on the FPSC (Financial Planning Standards Council) website to foster proper legislation and standards in financial services for Canadians.  Click here   http://www.financialplanningforcanadians.ca/campaign/

We are forever grateful to serve you and your financial wellbeing for life and beyond... Let me know anything we can be doing that enriches or enhances our service to you right now.   Yours always,


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
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** 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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