Should You Be Worried Now That “The Market” Is At All Time Highs?

Unless your portfolio was positioned in the most conservative of ways through much of 2017 (or had a significant tilt in that direction), a well-diversified, global portfolio produced healthy returns that were in very high single digits to the upper teens.

If the Canadian dollar had stayed constant (mainly vis a vis the US dollar), portfolio returns would have been higher.  However, during 2017 the Canadian dollar increased by 7%.  With a primarily globally invested portfolio, this kind of move for Canadian investors, has a reducing effect on portfolio returns.  However, as I said at the outset (despite the Canadian currency’s strength), very high single digits to high teens, is I’m sure you’ll agree, quite good.

Since most people have a substantial amount of their net worth tied up in Canadian dollar denominated assets (ie their home, other property, a business), having the rest of one’s portfolio in global assets is a very important diversification tool.  This is most appreciated when a portfolio is used to produce retirement income.  When the Canadian dollar falls, goods you buy in Canada (ie groceries) become more expensive.  This cost increase is offset by the increase of your portfolio which is helped by your non-Canadian investments.  When the opposite happens, like it did in 2017 (the Canadian dollar rising), your cost of goods (again, groceries), tends to fall and thus your portfolio doesn’t need to produce as high of a return.  I digress.

The market indexes, specifically the DOW and S&P 500, have been touching historic highs.  This has stirred much conversation (and concern).   “Can this (“the market”) go much higher?”

My question to you would be, “Do you own the market?”.  Why that question?  Because although you may own investments that trade on public equity markets, you may not own the investments that make up the market index in which “the market” is measured.

What has made “the market” reach all-time highs are a very small number of companies whose share prices make up the largest percentage gain of  “the market”.  These include Boeing, Caterpillar, Visa, Apple, Walmart, McDonalds, Home Depot, UnitedHealth Group, Microsoft and American Express who were up between 34.1 to 89.4% in 2017 (source:  If you don’t own many (or any) of these, you don’t own “the market” and thus, the market’s high isn’t at all relevant to you.

To put this in to perspective, all you have to do is look back at 1999 when the market indexes were also reaching all-time highs.  Subsequently, they fell off a cliff.  If you didn’t own the biggest part of “the market”, which at the time was mostly tech, your portfolio, rather than falling dramatically, simply didn’t do much.  I know, because that is what virtually all of my clients and I experienced at that time, portfolios that didn’t do much because we didn’t own “the market” (which was fantastic in light of what “the market” did).

To determine the actual risk level of your portfolio is to know if each of your holdings are of fair value (or lower) based on what the actual business is doing now or, even better, based on what the business would be worth in a less than ideal economic environment.  That number, the intrinsic value of each of your holdings, is something that needs to be calculated continually.  If one of the investments you hold is selling far above what it is truly worth, that investment needs to be sold.  If something can be found with a much cheaper value proposition then that is where your investment dollars should be reallocated.  This is a process that our client portfolios go through continually.  “It may go higher”or “everyone owns it” are not relevant criteria or reasons to continue to hold a particular investment.  Risk gets taken out by selling that which is overpriced.  If you do own “the market”, you MAY own overpriced investments.  I’m not making a value judgement on any specific investments mentioned here though.  What I am saying is that owning a portfolio of companies that 1)  isn’t representative of the market and 2) is priced below the market, puts your portfolio on solid ground no matter what happens to “the market”.

Of course, a more broad question would have to be asked about economic growth prospects (which is what is what really determines upward movement of share prices as a whole) and thus, the continued postive returns for investments in general.  These reasons for optimism in that regard include:

  • The global economy is at a level of synchronization that hasn’t experienced in many years.
  • The current strength of global manufacturing is at the highest level since February 2011. Taken on its own this is a strong indicator towards continued earnings growth for 2018.
  • Interest rates have only just started to increase around the world. The US is the farthest ahead in this respect.  Economic slowdowns most always happen after a long trend of increasing interest rates.  Unless the global economy is weaker than we think, interest rates will continue to go up.  If it’s slow, then this investment market uptrend will last longer.
  • Inflation remains very low and has shifted away from deflation concerns.
  • Energy prices have trended up steadily from a low in the summer of 2017 in optimism of a global economic recovery although remain at relatively low levels.
  • Chance of a global recession is very low.
  • We have been experiencing low volatility (they have been behaving).  Market corrections don’t normally happen in this kind of environment.
  • Despite geo-political tensions emanating out of North Korea, Brexit transition, US vs the world in trade re-negotiations, rarely do events like these translate into a sustained market downturn.

2017 was a good year for investment portfolio returns.  Recognizing though that, despite many things looking good for the global economy, when we enjoy above average returns in any given year (or for a string of more than 1), you can expect returns going forward (that includes 2018) to move closer to the mean.

PS.  I have a dinner meeting on Thursday January 18th 2018 with 1 of the 3 strategists who lead a group of 60 plus investment specialists responsible for making investment decisions on over $65 billion of assets. Always good insight to be had when talking candidly over a meal and wine.

The information in this letter is derived from various source and is provided for general information, subject to change without notice. Although every effort has been made to compile this material from reliable sources; no warranty can be made as to its accuracy or completeness, and we assume no responsibility for any reliance upon it. Before acting on any of the above, please contact me for individual financial advice based on your personal circumstances.

Don’t Pay Your BC Property Tax (if you are 55 or older)

Stop reading now if you want this to be a property tax revolt rant.  It is rather, a way for you to take advantage of something offered to home owners by the BC government.

Last June Cheryl and I moved into another home within the South Surrey / White Rock BC area, after being in our previous home in “Ocean Park” for 21 years.  We don’t like to move and seeing as we think we have found a place we can live, for several years, we shouldn’t feel the urge to move again, I’m hoping, for 15 years at least.  It’s bright and has enough room, but not too much ( although our new garage is much smaller than the 20 x 36′ we had before).  It is in a neighborhood that has many families with school aged kids, keeping us on a  youthful and vibrant lifestyle path.  As well, when we moved, a very important factor was being able to easily walk back and forth to our office.  We now have that with only a 400 meter stroll and the luxury of going home for lunch, as well as being able to walk to so many other urban amenities.

Because of our expectation to not be moving for several years, and that I will be 55 in 2018,  this is the last year I will be paying property taxes when they are due, which for BC property owners, is on July 2nd.  If you are 55 or older now, I’d suggest you would be financially better off, not paying your property taxes either.

The reasoning is very simple for this to work.  Do you think you can earn more than 0.7% on your money?  0.7% is the interest cost the BC government is going to charge you for not paying your property taxes so all you need to do is make more than 0.7% / year.  Here are what the numbers look like under various investment return scenarios, assuming a $5,000 / year property tax bill that increases 3% per year:

End of Year… Total Property  Tax Owing @ 0.7% Interest Investment @ 1.5% / year Investment @ 3% / year Investment @ 5% / year Investment @ 7 / year Investment @ 9% / year
1 $5,035 $5,075 $5,150 $5,250 $5,350 $5,450
5 $27,097 $27,740 $28,982 $30,129 $31,322 $34,458
10 $59,472 $62,042 $67,196 $73,382 $80,242 $92,963
15 $97,999 $104,117 $116,848 $134,147 $154,637 $189,343
20 $143,694 $155,382 $180,611 $218,151 $265,685 $345,012

As you can see, even using a relatively conservative 3 – 5% / year will put $37,000 to $74,000 in your pocket after paying back the property tax you owe (including the interest).

The first consideration for where to deposit this money should be to your TFSA (assuming you have room left in your $52,000 contribution room limit).  Any gains you make in your TFSA are completely tax free.   Next is you need to choose an investment that fit with your time horizon (you don’t want your cash simply sitting in a bank deposit or savings account because the long term benefit is relatively small ie $12,000 over 20 years).Some people struggle each year to pay your property taxes?  If so, instead of trying of trying to gather the money together to invest, why not simply pay your property taxes when you sell your home?  I would only suggest this if you expect to be moving to a cheaper home and will free up some equity at that time.

What if you struggle each year to pay your property taxes?  Instead of trying of trying to gather the money together to invest, why not simply pay your property taxes when you sell your home?  Think of this like a very small Reverse Mortgage but at a much cheaper cost.  I would only suggest this if you expect to be moving to a cheaper home and will free up some at that time.

The only 2 situations I would not recommend this for is:

1)  Someone who is still working and finds they aren’t saving much (or anything) for retirement and probably won’t actually end up putting the money aside to invest.   It really comes down to your history of being disiplined enough to save.

2)  If you have a large mortgage on your home relative to the home’s value and your income.  Refinancing or trying to get a better mortgage rate could be a bit more difficult since you would have a property tax lien on your home.

This BC Government property tax deferral or “deferment” program isn’t only for those who are “house rich and cash poor”.   The only stipulation is that you need to be 55 years of age or older (although it does apply for a surviving spouse of any age or a person with disabilities).   I will be doing this in 2018, joining my clients who have put this in place already.  I’d suggest you should consider it to.  This is one of those “small advantages” that can snowball into a big one.  Determining if it works for you and how to most effectively use it over time however, should only be done with the advice and direction of your trusted Financial Planner.

More Info on the BC Property Tax Deferment Program is here

Comments?  Please feel free!  I would love to hear your insights…

Risk – It’s Not Understood and It’s Very Often Ignored

Risk.  It’s a 4 letter word, one which we want to avoid.  But what does “risk” really mean?  What does it look like?  Are you focused on trying to avoid one kind of risk, a risk that is mostly about how you feel, when there are other risks that are actually more …. risky?

When I put myself in a client’s shoes (your shoes), the biggest risk I’m sure you hate going through is seeing your portfolio fall in “price”.  Although it feels like a risk, it is not risk that you should be really concerned about because when you own high quality investments, the “price change” is always temporary; yes ALWAYS.  Price only falls because of temporary uncertainty in the market place.  It is usually big and wide spread and for that reason, emotion takes over.  The 2 biggest REAL risks one faces are:

  1.  I might lose money and not get it back. This is permanent loss of a money and almost always is related to buying an investment that was worth no where near what you paid for it.
  2.  Outliving your money.  This comes from taking a monthly income from your portfolio so you can pay your retirement household living and life (ie travel) expenses.  With this risk, your portfolio may not be growing fast enough to match what you are withdrawing.

From a box ticking off exercise required by the various financial regulators in Canada and how most people see it, risk definition is based purely on short term portfolio volatility; how much a portfolio goes up and down.  This narrow definition of risk means that a portfolio that bounces around less, is considered… lower risk… tick.  However, having the avoidance of price “up and down risk” as your primary portfolio objective, you can actually increase risk #2.

How about if your portfolio isn’t going up as fast as what your friends and families’ are enjoying?  Human nature is not to miss out on this good thing.  In other words, to actually own a high risk investment so as not to look wrong or daft (I’ve been watching a lot of British shows recently hence the word “daft”).  Doing so exposes a portfolio to risk #1 as well as #2.  This is where we as undisciplined humans, ones susceptible to peer influence, can get into trouble.

A high flying pharmaceutical company is the most recent bright shiny thing that many novice and professional investors alike couldn’t and still can’t seem to resist.  At it’s peak last summer, 73 multi-million and several billion dollar portfolios had allocated 4% or more of their client’s money into this company.  Most of these didn’t invest because they thought it was a good business but because they simply didn’t want to miss out on what everyone else was investing in.

One very large, multi billion dollar Canadian bank owned portfolio was those and actually invested in this company just before it hit it’s nadir.  In reference to the decision, the portfolio’s June-2015 interim report stated:  “The portfolio manager was skeptical…. but being absent of the 3rd biggest stock in the benchmark was too high of a risk.”

This comment is a fairly explicit admission that the investment manager was willing to expose his clients to capital risk (permanent loss of capital) despite having significant misgivings about this company.  He invested in it because he didn’t want to look bad or stupid not owning it when so many others did.  Sounds like someone who was more concerned about losing his job than the safety of client’s money?

Another example is from one of Canada’s widely recognized investment management names.  It also added this risky investment on behalf of thousands of people like you and me, to make it the portfolio’s 3rd largest holding.  However, one of the parameters of the portfolio was that ALL investments must pay a dividend.  This company did not.  A portfolio manager who was willing to go against why their clients invested in the portfolio in the first place, so as to not to look wrong in the short term.

Ironically, this isn’t all that surprising really.  Many investment management companies are sales driven.  Looking wrong today undermines more money coming in for them to manage, today.  This significant deviation from their investment discipline so as not to impede new money coming in, puts existing clients, those with money already in the portfolio, at risk of permanent loss of capital.

If you think that the solution to avoiding this is to rely on the internet for investment advice, there is strong evidence that this is significantly fallible as well.  I can pull up all kinds of well respected investing sites that don’t want to look wrong in the short term either.  Index investing?  No help either.  By default you are automatically invested in a company such as this as it goes up in price.

Not worrying about what an investment’s “price” being  down temporarily (the lowest kind of risk), knowing what an investment is actually worth, a deep understanding of what the high probability of permanent loss of capital is, a highly disciplined approach to applying it and the willingness to look wrong for what could be quite a very long time, is the only prudent and lowest risk way to have your portfolio managed,

What Active Management Is & Why I Think It Is Superior


“Active Management” is investment management that is continually turning over rocks to find investments that other investment managers are unwilling to invest in or simply just don’t see.

  • They are willing to do a lot of digging to find undiscovered or misunderstood investment gems.
  • They generally invest in a concentrated list of approximately 20 to 35 investments giving them enough diversification to be truly diversified and reduce risk but not too much to be “de-worsified” (risk is the same but you get lower returns)
  • If they find another business to invest in, they compare it to all the others they hold.  If they buy shares in this new found business, they sell the least attractive.  I call this Disciplined Scrutiny & Discernment.
  • They meet with the management of the businesses they own because they see themselves as “buyers of businesses rather than renters of stock”.  When they find an excellent business and can buy shares of it at a good price, they buy it with conviction.  They can do that because they have gained a very deep understanding of the business and are convinced that it will do very well over the long term.
  • If they have cash in their portfolio and can’t find an excellent business to buy at a reasonable price, they keep looking until they find one or the price of one of their existing holdings get’s temporarily, bargain priced again.

During that “long term” though, they don’t just hold the shares of that business forever.  They take advantage of the sometimes, significant price changes in what people are willing to pay for the shares of the business.  They know that many others will finally realize what a good business it is, how much money it is making and will invest also.  This will push the share price of the business higher and higher, most often much beyond what the business is truly worth.  This is when active management, will sell part or all of their shares in the business knowing that an event will materialize,  soon bringing the price back down to more realistic levels.  At this time they become buyers again.  They can do this because human nature gives us many more reactive investors than disciplined ones.  Discipline takes continual effort to stay disciplined.  The reactors, never really understood the business they are buying or really know what it is truly worth (they just think it is worth what the market will pay which is dangerously wrong) so when the economic environment seems uncertain, another investment story is widely told or the company runs into a short term but fixable problem, the shares of this excellent business are sold indiscriminately and the active manager takes advantage of the emotional reactions by the “reactors”.

The majority of the investment management available to investors today are not truly active and this percentage of active investment managers vs “index huggers” (measured by “Active Share”) has steadily widened.  The vast majority of what many people think are active managers, are simply “index huggers”.  These are investment managers that simply sit at their desk, look at their computer screens, read the research that is widely available and buy what everyone else is buying which is most of the companies in a particular stock index (ie TSX, DOW, S&P500 etc).  They do this for fear of losing their jobs with the firms they are with.  If they know they will perform like everyone else how could they get fired?

An active manager is willing to have the investment portfolio they manage on behalf of investors like you and me, look very different than everyone else.  They are doing the digging and through that very thorough process, are finding businesses that are under appreciated.  Through their deep, proprietary research and and active management, the end result can only be to produce returns that are better with less risk, than a faux active manager or index investment can produce.  That case is actually more evident today than ever before which is why I selectively choose highly talented (as voiced by their peers and mentors and clearly evident in their results) active investment management for my client’s portfolios and for mine.


A Bit Of Information Can Keep You From Making Costly Mistakes

I am finally getting back to the blog posts after  a business transition which I started preparing for in the Spring of 2014 and have now finished the biggest part of.  If you are a client reading this, you know what that is all about and I thank you again for your patience and your efforts in helping me through this.  What I didn’t miss a beat on through this time was the “Mutual Gains” financial letter which I have written every 2 months since 1987.   If you aren’t subscribed to that, I really encourage you to do so.  Do that here and do that now.

The reason I say “really encourage” is because just this morning a client of mine emailed me asking if she should put some extra money in the RESP she had set up for her daughter.  It caught me a little off guard.  I thought “am I losing it or did I set up an RESP for her?”.  I had to check my records.  No, I wasn’t losing it. Unfortunately, what she was referring to was a “Scholarship Trust” RESP she had set up, I’m guessing, right after her daughter was born.  You know, the one a salesperson calls you about right after you just had a new addition to the family?

I say “unfortunately, because I don’t recommend these plans at all.  They are heavily front loaded in fees to pay the salesperson who sold you the plan.  As well, your money is invested strictly in Government Of Canada bonds.  With interest rates at such low levels and considering how long the money is going to be invested for (18 to 22 years or longer), the money you potentially can have, versus what you will have, could be miles apart.

Anyway, the point is, the caveats and warnings I had written about many times about scholarship trust RESP’s were there.  They just had to be read.  Although, frankly you don’t even have to do that.  An email or phone call to me or any other financial advisor would have kept, what I deem to be, a costly mistake from being made.

So if you didn’t already click on the “do that here and do that now” link above, you can subscribe to the communications that come from my desk by clicking here .  If you were notified of this blog post through an email, you are already on the E-Loop.

If you want to see what I wrote in the past about Scholarship Trust RESP’s you can find them here:

Mutual Gains #121 (Sept / Oct 2007) , In the Hhhmmmm section of Mutual Gains #153 about the fees and a recent warning in Mutual Gains #159.  As well you will see reference to it in one of my bLoG posts and referred to on the sign up page for the E-Loop.

If you need to find anything I’ve written in the past, you can do a search directly on the Mutual Gains page (sorry, but only the issues from mid -2003 and later are posted…so far).




Focusing On Your Strength Is The Secret To Success – Lessons From The Norwegians and The Dutch

It has been almost a month since the Winter Olympics in Sochi ended however, the results of it and the lessons that can be learned are perpetual and powerful.

Russia topped the chart of Olympic medals for a total of 33.  The next 4 top hardware winners were Norway, Canada, USA and Netherlands.  The incredible thing about Norway and Netherlands is those 2 countries were in the top 5 for medals despite having a much smaller population.  In fact, Norway and the Netherlands have a combined population that is less than 5% of the combined populations of the U.S. and Russia.  This means a fraction of the population from which to cultivate and create Olympic competitors and in the end an amazingly strong slate of Olympic medal winners.  

Historically, Norway has won the majority of it’s medals in outdoor sports, namely biathalon and cross country skiing.  Norway along with German have won nearly half of their medals in biathalon.  Norway and 4 other countries have won 82% of the cross country skiing medals in the history of the Winter Games.  The powerhouse U.S. hasn’t won a cross-country skiing medal since 1976.  

In Sochi, the Netherlands, with another strong Winter Games showing, won 23 of their 24 medals in speed skating.  The other medal was in short track which really is just another version of speed skating.  

So, what does that information mean?  There is one thing that stands out very clearly; unless you focus and spend a lot of time on something you can’t expect to be exceptional at it.  Most of us spend the largest part of our time working.  You probably do what you do very well and I’m guessing much better than someone who doesn’t spend the same time in your craft.  Doing something over and over gives you time to continually improve what you do.  It becomes second nature.  When you aren’t working in your profession, I know you are most likely pursuing other things that you are passionate about and of course, the roles you fill in your family and the relationships around that as and or / an organization that you are part of.

So what happens to your finances?  What happens with the savings you accumulate and need to have invested to replace the the income you are going out everyday now and earning?   Yes, there are certain things that we need to do ourselves, however when we want things done really well we need to have other people do the majority of that work, those who specialize in those areas.  Alternatively, you can try to specialize in a secondary discipline by dedicating every waking hour outside of work to get really good at financial planning.  

For me, outside of my professional role and duties as a Financial Planner and Investment Advisor / Allocator, I love reading various books on the intricacies of how the world works and the realities of how we as humans make decisions, reading about and listening to music both old, new and various genres, playing drums to recorded music and learning new rhythms and rhythmic ideas, cycle touring in the summer, being a tourist where I live and in other towns and cities, engaging in challenging conversations as well as humorous banter with Cheryl and our closest circle of friends.  

What do you specialize in for work?  What are you passionate about and get real joy out of doing outside of that?  What can you really focus on and devote the energy to really excel in?  If Financial Planning and Investment Management aren’t in that list, I’d suggest finding someone you can work with to fill those roles so you can be excellent at and enjoy the things that you do best.  Could it be, one of those things that only you can excel at, is being an excellent spouse, parent, grandparent or friend?



Are Homes Really That Much Less Affordable Now Than In Years Past?

Since the early 80’s, interest rates have fallen.  If you look at it on a graph, it hasn’t been a straight, sloped line downward.  It has been more like an an uneven slope of a long hill where there are flat spots as well as spots where you are actually going up.  Despite that, what we have all experienced is a multi decade trend down in interest rates where you have interest rates at the lowest level we have seen in over 60 years.  From here, interest rates can’t really go very much lower.  In other words, the trend has ended.

Residential real estate prices have one of the biggest beneficiaries of this long, slow decline in interest rates and it’s very simple to see if you do a bit of digging.  

Both historically and theoretically, real estate prices go up by the rate of inflation plus little bit more per year because land where people want to live gets scarcer as a city multiplies in population.  There is simply more people that want to live in the city but less and less availability of housing product.  This makes people move out further from where they work or where they would prefer to live thus creating a ripple effect into the suburbs.  Migration takes bigger leaps as well to other cities farther away (in B.C. that would be Kelowna and Squamish).  To offset that we have gone up and smaller in the city and created a wider range of home choices in the suburbs.

Let’s get back to the question, “Are homes  really more expensive today?”  Well, sure they are, the sticker prices say homes are more expensive.  However, most people don’t buy based on a sticker price they buy based on what it will cost on a monthly basis.  That is what really determines affordability.  I‘ll use an an older apartment building in Richmond as the example since I have some personal experience here.

The cost of the biggest ground floor unit in this building was $100,000 in 1990.  Interest rates were at 11%.  Assuming you could get a mortgage on the full amount, the monthly cost at that time was $963 / month.  Today that same condo would sell for about $275,000.  Again, if you could finance the full amount, the mortgage payments would be $1,373.  The sticker price of the condo is 275% higher than it was 24 years ago however the payments to buy it today are only 43% higher.  From those measures alone, you can see that the monthly financing costs to pay for a home has gone up much less than the actual sticker price.  Of course, we can’t just end it there.

We have to take into account 2 factors that go hand in hand, wages and inflation.  People pay for a home with their take home, family income.  For this, I’m going to use minimum wage as the benchmark for wage increases as it is a very easy historic number to nail down.  In 1990 B.C.’s minimum wage was $4.50.  Today it is $10, a 122% increase.  I’m not going to say wages have gone up by that amount across the board because there appears to be evidence to show that they haven’t.  Even if you assume it hasn’t gone up near that amount I think you and I would agree that wages have gone up since 1990.  I think if you look back at a cross section of occupations we’ll both come to that same conclusion.  Remember, the cost of paying for a mortgage today is only 43% more than it was 24 years ago.  That works out to 1.5% per year  Inflation has increased by 2.1% per year during that same time frame so simply from an inflationary perpective, home financing costs are actually less.    

What those 2 things together indicate is that the actual carrying costs as a percentage of income today show much evidence that monthly home financing costs actually take up less income today than they did 24 years ago.  As I side note, I’m not taking income taxes into account, food prices or whether the inflation the government calculates are accurate however the fact that the highest income tax rate in B.C. was over 51% and it is under 44% mitigates some of the potential discrepancies that can be argued in those.  

So why is it perceived that housing is so much more expensive than it was in the past?  I think there are a few reasons for that.  

I have reason to believe that most of us want as much (and often more) than what our parents had.  This isn’t anything knew.  I was interviewed on the CKVU noon hour news in the early 90’s and I suggested that exact same thing on the “housing is too expensive to afford topic”.  How many of you who are in their 50’s or 40’s today, flew somewhere warm for Spring break every year?  How many TV’s did you have growing up?  Did your parents go out for dinner or coffee as much as you do now?  How about all those home appliances we have now not to mention the electronic gadgets that we continually go through.  It is simply a matter of wanting more, wanting it new and wanting it… now?  The meteoric rise of consumer debt over the past 20 years would suggest that as well (household debt in Canada is at 164% of income in 2013, double what it was 20 years ago).  

The second is those of us who have kids who have yet to buy homes or saw prices rise dramatically over the past several years simply look at the sticker price of homes and say “houses are unaffordable for the younger generation”.  If it appears so, it must be so?  I’d suggest not.

Having said all of that however, this question must be asked.  If interest rates have been in fact the tailwind to rising housing prices then what happens when interest rates trend higher from the lowest levels we’ve seen in over 60 years, while consumer debt is at all time highs?  As always, I welcome your comments and input on this topic. 

Why Height Of The Market Doesn’t Matter With An Actively Managed Portfolio

“The Market” has gone up dramatically over the past 5 years and more particularly, over the past 12 months.  So, should you be worried?  

Having experienced it personally and through hundreds of long term client relationships (most notably in 2000 through 2003), I am convinced that….. if you don’t own “the market”, you don’t have anything to worry about.  The operative tenet though is not owning the market.

“Huhhh?”  You have a puzzled look on your face so I’ll explain (although if I didn’t we’d be stopping here, which doesn’t make for a very compelling BloG now does it?).

If you are a lot like me and my clients, your investment statements have looked healthier and healthier over the past 5 years.  In fact, for many of us they look better than they have… ever. 

One of my roles in overseeing and advising on client portfolios is to meet with the investment managers we have chosen to actively manage specific “portfolio building blocks”.  I say “actively manage” because, despite what may not readily see happening inside any specific portfolio piece, there ongoing activity of researching, buying and selling holdings to do 2 things; increase returns but also to lessen risk.

Last Wednesday evening, I and a few other financial advisors from some other financial planning firms in and around Vancouver, enjoyed dinner with an investment manager (“Geoff”) who we all use for parts of our client’s portfolios.  Why were we there?  Because we all agree that partnering with the best active investment management firms is what we want for ourselves and our client’s portfolios.

The best way a financial advisor like myself can get is over a relatively informal dinner.  I’m sure you find as well that much more “ah ha’s” can be had in talking with someone face to face in a relaxed environment.  Wisdom can be found which is much more valuable that simply information from inanimate means. 

Over dinner, one of the many facts “Geoff” brought to our attention was that 6 months ago, their portfolios were 18% in cash.  They weren’t sitting in 18% cash because they were concerned with the height of the market.  This relatively high cash position was simply a bi-product of investments they had made had either reached a level in which they were over priced or were taken over by a much larger company.  In other words, the high priced holdings had been sold out of the portfolio and they now had fresh cash to reinvest.

Today, their portfolios are on average 11% in cash.  Why would it be less even though “the market” is now higher?  Because, while they made money on several of there individual investments, there have been others that they have wanted to own for a long time but were waiting patiently until they could get them at the right price.  During the same time that some of holdings were being sold because they reached prices that were deemed to be expensive, compelling buys were presenting themselves.  Simply put, they are uncovering investments that a lot of people (“the market”) isn’t paying attention to.  They are finding more things to buy then they had previously sold, all in a time when “the market” (the investments that the masses are chasing) was higher and overall, much more expensive.

So, if you don’t have a portfolio that is going through this ongoing cleansing and revitalizing process, then you definitely have to be concerned about how far “the market” has gone up because in that case, you probably do own “the market”. 



Should Someone Other Than You Decide How You Work With Your Financial Advisor?

Working in the Canadian financial services “industry” means dealing with all kinds of regulatory bodies covering and intersecting every spectrum of finance in Canada.  I have been told by an executive at one of the insurance companies that there are 53 financial regulatory bodies in Canada.  That sure is a lot of regulation.  I say that with underlying frustration in having to deal with, what I view as very often, less than common sense rules however recognizing that it is this regulatory structure which has created one of the best financial systems in the world when it comes to being able to have confidence that you and I are well protected.

One of the areas that has been going through changes recently is the transparency of the costs of investment products that you may own and how investment advisors are compensated.

Most of the financial advisors in Canada, are advisors that get paid for the work they do for clients by the institutions where their client’s money is placed.  In essence, the compensation paid to advisors is “bundled” together with virtually all of the other costs of your investment portfolio.  For many advisors, this is (and has been for many, many years), the default option taken with their clients although it isn’t the only option it’s simply the one that has been the most commonly used.   Through that, financial advisors have provide a wide range of services including financial planning, portfolio constructions, retirement projections and planning, tax advice and education planning.   The “bundled” cost (referred to as MER, or Management Expense Ratio), is reported in various financial documents advisors and investment management firms are required to provide to you initially and on a regular basis.  Further improving the transparency on how much your investments cost will improve as well over the coming few years.  That issue isn’t being questioned and for most parties concerned, is being welcomed.

The issue I want to bring to your attention is a proposal that financial advisors be required to charge their clients directly for the work and service they provide to their clients.  In other words, what some parts of the financial regulatory system in Canada are pushing for is that your financial advisor will move from a “bundled” arrangement to a “direct” fee structure.  In other words, the advisor you work with will have no choice but to send you a monthly, quarterly or annual bill for the work that he or she does for you.

This discussion has been going on amongst the Canadian financial regulators and the advisory channels for sometime now.  I’ve watched the discussion evolve but I’m guessing you probably have no idea that this has been talked about.  Ironically, you are one of the parties effected yet you haven’t been given a say on this issue.  Here is your opportunity to change that.

To give you that voice, one of the investment management firms I work with has put together 2 brief videos explaining 2 various compensation models, “bundled” and “direct”.  Along with that, a very short survey through which they have been compiling the responses.  These will be submitted to the financial regulators who, in the end will decide how advisors and clients work together.  This is your opportunity to confidentially tell the Canadian Securities Administrators (CSA) and in turn the government, if you want the choice or not.  That ultimately is the question.

History has shown that, a free market has always been the better route than a legislated one where “no choice” is the only option.  I think it should remain a free market where clients and advisors together choose how they want to work together.  However, that is my opinion.  Please feel free to call me directly or email me with any of your questions.  Whether we work as partners on your financial planning, or not is irrelevant.  It is the discussion and ultimately what is best for you that is most important.

PS.  Of course, I would love to have your input on this discussion and hopefully, stir a debate so that the right outcome in the end is the result.  You can do that in the “Comments” section below.

PPS.  This survey is closing November 8th so if you want a voice on this, I ask that you do it here, now.


The Hole At the Bottom Of Our Income Bucket

I’ve had my cell phone for almost 3 years.  Its relatively old technology and it’s not something I can engage in conversation about with a group of friends.  It could use an upgrade and what was a very cheap cell phone plan is now not that cheap any more in relation to what is available now.  This has me looking at what is being offered today.

There are all kinds of cell phones that you can buy and I always hear the “I got this phone for free.  I only pay $X per month”.  The cell phone companies have done a great sales job in convincing so many people that phones are free or you can get them at a steep discount.

The reality is, that phone isn’t free or even cheap.  A portion of what you are paying on a monthly basis is being used to pay off what the cell phone company bought the cell phone for from the Apples and Samsungs of the world.  In the end, your monthly cost is higher than what it would normally be if you kept your old phone, or got one from somebody that tires easily of their phone.  In other words, that $300 – $700 phone is being paid back to the cell phone company over the course of a couple of years.  If you didn’t enter the 2 year agreement you could get a the same cell phone plan for less per month.

Most of us like and want new things.  New things often work better than old things.  New things can make our life easier.  However, that grasp for new things has a price.  That price comes in dollars and cents and it’s most often a price paid on a monthly basis.  This monthly drip lessens us feeling of the financial pain however self inflicted monthly costs have a much deeper cost.  That more precious cost is paid at the expense of  our psychological freedom, our peace of mind.

More recent to my recent cell phone gazing (which I must confess, I could very well end up with a new phone… although it won’t be “free”), we put our family’s satellite TV service on hiatus.  We did this early in the summer and are seeing if we can continue this consumer item cut back.  It really isn’t much of a  lifestyle curbing for us since we don’t watch much TV anyway.  In the past we have mostly PVR’d movies, the CTV 6pm news, Dragon’s Den and Shark Tank.  But watching TV on average for 1 hour per night isn’t worth the cost of what we have been paying satellite.  However, our alternative is a lot cheaper.

In talking to friends, we decided to try and have managed to subscribe to the U.S. version of Netflix through an IP mask which fools websites you are visiting that you aren’t really in Canada.  If anyone has any ethical arguments against that, please let me know.  The way I see (or maybe rationalize it?) is that it isn’t any different than going across the border for groceries, but again, I’d like to hear any feedback from you on that issue.  You can do that in the comments at the bottom.   But I digress.

What this change in entertainment viewing service has done is cut our bill from over $60 / month down to $8.  It has given us very large library of movies and TV series.  Couple that with all the TV you can watch over the internet on various TV network’s websites and you have a full slate of viewing pleasure.

Did I mention that we also just cut the land line in our house?  With 3 people in the house and 3 cell phones, this should have been done a long time ago.

The point is that monthly costs, particularly those attributed to our own particular lifestyle definition, restrict us of true freedom.  The more we want them the more we think we need them which makes it more akin to a heroin syringe.   And that hole at the bottom of our income bucket called monthly expenses means we have to keep filling up the bucket, limiting the freedom to choose  how much income needs to be attached to how we spend our time.