Let's have a peek at what has been happening with the components of the 60/40 model:
(60% Equity / 40% Fixed Income)
Remember that the idea behind the 60/40 model is balance and diversification over long periods (multiple years). The different asset classes that are represented will have periods of out-performance and under performance over this time, but the mix is intended to drive down volatility and provide target annual average returns of between 7 and 8% over a multiple year time horizon.
Returns are before fees and tax considerations and are based on a broad mix of ETF's with consistent weightings back tested over 11 years, re-balanced quarterly (inclusive of the period 2008-2009), however historical returns are not a guarantee of future returns.
Best performing assets (total return) this year to date (since Jan.1):
Other notable performances:
In reference to the theme that different assets out-perform and under-perform at different times (and justification for sticking with this model over long periods):
last year at this time, the best performers were:
What is a highly important process in this type of model is the on-going re-balancing which trims (sells) the out-performing assets back to their original weighting and redistributes the cash by buying the under-performing assets which are underweight.
This is on-going profit-taking and using the proceeds to pick up under-valued assets.
For example if you trimmed Canadian Preferred Shares (last years out-performer) and picked up International Large Cap Companies (this years out-performer) you have added significant value.
Balance, Diversification and Re-balancing are the keys to successful investing over a multiple year time horizon.
One of my themes for 2015 is that central bankers do not like volatility in financial markets because it creates uncertainty and in turn erodes confidence.
Confidence is important to to economic growth because consumers need to be confident about their future prospects in order to spend.
Businesses need to be confident in order to invest in growth.
Otherwise both will postpone their spending and investment decisions until they become more confident.
Central Bankers have been fighting volatility with stimulative ("easy") monetary policies since 2008 in order to curb volatility and inspire confidence.
The European Central Bank (ECB) embarked on an aggressive bond buying strategy at the beginning of 2015 as a form of "Quantitative Easing" to jump-start a European economy that has been been stalled and suffering from deflationary pressures.
The impact of the the bond buying strategy drove short-term interest rates into negative territory and German bond yields to close to 0 in mid April.
However, at the end of April and into early May bond market volatility spiked as bond investors became more concerned about the future end of the Quantitative Easing and a jump in inflation.
This spike in volatility combined with the concerns over Greece has impacted European Confidence in May:
In light of the volatility in early May, the ECB , in an effort to bring it under control, announced that they were increasing their bond buying in May and June. This has decreased volatility, but it remains to be seen if this will impact future consumer and business confidence.
The Up-Trend For The S&P 500 Is Still Intact.
Volatility jumped yesterday, but in general has been well below its historic averages and certainly significantly lower than it was earlier in the year:
What comes next?
There is a reason why professionals are labelled as such:
They have taken the time to study, pass exams and practice their profession for many years.
I remember the first time I tried to install a new shower valve myself:
12 hours and 3 spools of solder later, I called the emergency plumber, who quite cynically quipped that he had attended school for 2 years to learn his trade.
As will always be the case, there are some who may take advantage of their superior education and training to over charge and under serve their respective clientele.
This prompts a number of folks to decide to try it on their own.
In the investment industry, the advance of ETF's (Exchange Traded Funds) in recent years has offered the DIYer's an opportunity to get low cost broad exposure to create balanced and diversified portfolios.
When the equity markets are rising in price (as they have been since 2009) it is easy to persuade yourself that you are good at this investing thing.
The S&P 500 (total return) is up approx. 21% annualized over that 6 year period.
The SPY (low cost ETF ) is up just a little less that that.
The EFA (non-North America) ETF is up approximately 14% per year on average over the same period.
The broadly diverse World Equity Index ETF (ACWI) is up approx. 17.5% .
Not even the housing market in Toronto or Vancouver has given off this kind of return.
Of course you had to have bought in at the bottom in March, 2009 and held on through the stomach churning "is it 2008 all over again" period in 2011.
And then you had to resist the urge to take your profit along the way (and perhaps re-enter at higher levels).
Of course, all of the DIYer's that I talk to have done this and then some.
It's been a great run.
But what comes next?
What happens if volatility spikes (few have confessed to being "unnerved" by last October's steep drop) again?
How will you protect that handsome return?
Is it worth it to pay an additional 1% per year to get an expert to help you re-balance and to ensure you keep all that hard-earned return?
Oh, and good luck with this....
Need help (not with the car engine or plumbing though)?
Let me know.
While the "headline" numbers look passively benign, when energy is factored out, both Canadian and US Consumer Price Index (CPI) data show inflation creeping higher.
China: Slowing Economy
= expectations of lower interest rates = record equity prices:
2015 = +44%
Germany: Business Confidence stalls:
Clearly it is not economic growth that is driving global equity markets, but it is lower interest rates or the expectation of lower interest rates as central banks continue to fight deflation and slow economic growth with stimulative monetary policies.
What happens when economic growth begins to improve?
What happens if economic growth does not improve?
How high is too high?
There was nothing significant in the Federal Open Market Committee (FOMC) minutes released yesterday other than a re-affirmation of expectations of better US economic growth in the coming quarters:
Some key points from his speech yesterday to the Greater Charlottetown Area Chamber of Commerce:
"The Confederation Bridge has simplified the trip since it first opened. If you come to the Island by car, you don’t have to navigate the waters of the Northumberland Strait. According to the Canadian Encyclopedia, the shallow waters of the strait are susceptible to strong currents, tides and turbulence. Even the most skilled sailor can find it challenging to read the winds and waves, and to judge all the cross-currents.
If only the Canadian economy had a similar bridge. We’ve been on a voyage of rebuilding since the Great Recession. But the trip has been longer and more complicated than previous recoveries because of all the cross-currents acting on the economy. Not only are the headwinds of the global financial crisis still blowing, but now we’re also dealing with lower prices for oil and other key commodities, which previously were a key growth engine for us. The implications for income and investment, and the adjustments they’re causing across sectors and regions, may take years to work themselves out."
(more at the link below)
In a nutshell:
Latest US Economic data:
Yesterday: Housing Starts showed some improvement after a difficult winter:
One of my Themes for 2015 has been that Central Bankers do not like volatility.
Volatility erodes confidence for those who participate in the economy:
Consumers who are uncertain focus on savings and don't spend. Businesses postpone investing in growth activities until there is more certainty surrounding the future.
Recent Bond market activity, especially in the German bond market (but also in north American bond markets), has been quite volatile as bond investors have become increasingly more concerned about building-in future inflation expectations in bond yields and prices.
In response, this morning the European Central Bank, through executive director Benoit Coeure, has announced that they will speed up their bond-buying operation (Quantitative Easing) in May and June. This has brought some buying back into bond markets as bond investor's fears of future inflation are brought back to more reasonable expectations.
In the UK, it was announced that inflation for April fell more than expected.
Meanwhile, last Friday's US economic data pointed to a less confident consumer and lower industrial production.
For the US Federal Reserve, a less confident consumer will be an important consideration when making the determination to begin to normalize interest rates in the US.
The US economy has begun the 2nd quarter of 2015 with a continuation of the anemic growth that characterized the 1st quarter: Industrial Production for April declined b y .3% and the Empire State manufacturing survey does not show much improvement for May.
As I stated yesterday, with consumers not consuming, producers have to scale back. The US Federal Reserve thinks that this is temporary (as it was last year), however the consumer has more purchasing power with both the higher $US and lower oil prices, but at the moment this is not filtering back into the economy. Is it temporary or is it a structural and demographic and therefore a longer term phenomenon.
BOC Governor Poloz has stated that he expects the US economy to pull the Canadian economy along in the 2nd half of 2015, as he expects that a weaker C$ (vs US$) will assist non-energy exports (and the US is Canada's biggest trading partner).
Lately, however, the C$ has been moving higher (as the US$ has fallen) and this is playing against his theory at the moment.
Currency traders have been "pegging" the C$ to oil prices since mid 2014 and this correlation, while usually short-term in nature, has continued.
Recently, since hitting a low near $45 in mid-March, oil has bounced back to near $60.
The $C has followed from a low of near .77 to its current level above .83.
The future direction of Oil prices is going to be watched closely by Governor Poloz as he tries to gage the impact of both Oil prices and the C$ on his projections for the Canadian Economy and the corresponding monetary policy if his expectations do not play out.
If the C$ gets too strong, Canadian non-energy exports could become less competitive and this scenario could become a drag on economic growth.
If Gov. Poloz lowers the bank rate, that could in turn push the C$ lower and give the Canadian economy a needed shot of adrenalin. It could also help if the US economy continues to under-perform.
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist