Red might be associated with the holiday season, but this year it’s looking a bit less festive to investors.
Stock markets are down, the Canadian dollar has dropped against its U.S. counterpart and Canada’s energy sector continues to struggle, pulling down the S&P/TSX Composite Index with it. Even gold, that safe-haven asset, has taken a hit and isn’t expected to bounce back until at least the middle of 2019, according to J.P. Morgan.
Volatility is causing concern among all investors, including Canada’s wealthier, especially for those nearing retirement. Here’s what four wealth advisors are telling their clients. They also offer a few predictions for 2019 and advice for keeping sane in turbulent times.
John De Goey, portfolio manager, Wellington-Altus Private Wealth Inc., Toronto
Mr. De Goey points out that markets have had a strong run until recently, and that managing investors' expectations is key.
“Before this, there were a couple of dips of extremely modest consequence, but this is really the first time in almost a decade when people have seen their accounts go down. So I keep telling people, ‘You know, you’re going to have a correction every seven or eight years, and you’re going to have a drawdown every three years. You’ve gone a decade without a correction.’
"I would say the majority of my clients are fine and they get it. They understand that it’s been a good run and that things don’t always go well.
"But there will always be a moderate-sized minority – I’m going to say 15 or 20 per cent of my clients – who are saying, ‘Well, don’t just stand there, do something.’ But good financial advising is about, ‘Don’t just do something, stand there!’ You have to resist the temptation to do something just for the sake of doing it because the evidence shows that the more people tinker with their portfolios, the worse they do.
"Portfolios are like a bar of soap. The more you touch them, the smaller they get.”
David Boyd, vice-president and portfolio manager, Boyd Wealth Management Group (BMO Nesbitt Burns)
Mr. Boyd is reminding clients that a good time to buy is when others are selling.
“People look at the headlines. We’ve seen interest rates rising on the U.S. side. We’ve seen the price of crude oil down. We’ve seen the [trade] issue between the U.S. and China. I’d be naive if I said there aren’t people watching the volatility on the news and asking, ‘What’s going on?’
"Do people see this as a buying opportunity? The notion of ‘buy low and sell high’ is easier said than done. If you hear from your financial advisor who is saying, ‘I understand your accounts are down, but I need you to add some more money,’ people aren’t going to answer the phone.
"But it’s one of those things. Would you rather pay retail or wholesale? If you like to buy things on sale – which is one way to build wealth – then keep sending money because at some point in the cycle, like now, you’re going to get volatility. You can buy stuff a bit cheaper than you could in the summer.”
Joel Clark, chief executive officer and portfolio manager, KJ Harrison Investors, Toronto
Mr. Clark predicts a multiquarter slowdown in 2019, partly because of the popularity of exchange-traded funds (ETFs) and the use of artificial intelligence (AI) in trading software.
“It’s going to be upon us quicker than we anticipated. You can see it in the rest of the world, which is falling apart big time, and the markets are down 25 to 30 per cent. The only ‘best house in the worst neighbourhood’ is the U.S., and it’s only been break-even for the year. So our view is you’re going to have a multiquarter slowdown."
Two factors at work here will be "this massive trend of exchange-traded funds and quants [quantitative trading that uses computer algorithms], which grew out of the last financial crisis. We’ve never gone into a true bear market with this level of AI and index type of trade. People are so long on indexes they’re not really looking at fundamentals and risk management.
"So you yell, ‘Fire!’ and it’s an instantaneous push-button effect. I worry about the market structure being able to handle a true bear market.
“But if you’re prepared for it, then you get a chance to reload. While everyone’s dying, you’re ready to make hay [by buying distressed investments]. But you’ve got to know your playbook. It’s like a football analogy: The quarterback has got a play for every scenario – and right now the playbook is cash and income [investments such as government bonds, investment grade bonds, utilities and REITs]. It’s the defence.”
Christopher Dewdney, principal, Dewdney & Co., Toronto
We’re definitely due for a haircut, Mr. Dewdney says. But diversification can help control the damage.
“There are all kinds of headwinds south of the border, which is our number one trading partner, and when they sneeze we catch a cold. But in addition to that, you have an unpredictable – and some might say irrational – president. Plus trade wars and terrorist attacks. There is a lot of instability in the market that reflects this.
"Diversification is key right now. I know that sounds like beating a dead horse, but you definitely don’t want to be the guy with all of his eggs in one basket, and then he trips. My clients have faith in the markets and economy. We sleep well at night knowing we are diversified, not just by asset class or sector, but also by geographic location.
"And we know that this too shall pass.”