January and the beginning of a new year drives a significant number of inquiries about what we do at High Rock for our Private Clients. Wealth and portfolio management encompasses much more than just investing. Planning and forecasting play a major role. As I have suggested many times (ad nauseum), you only have to take risk when safe investments don't give you enough return and growth in your savings and assets to stay ahead of the increase in your cost of living.
A 90 day Government of Canada T-bill which is the safest of all assets available trades at or about 1.2% on the wholesale market. After all the commission and fee deductions, etc., a retail or individual investor would be lucky to get 1%.
So we can call 1% the Risk-Free rate of return (at the moment).
Let us just suppose that your cost of living increases each year at or about the average rate of the Consumer Price Index (CPI). The base was set at 100 in 2002 and 16 years later it sits at 131.7, so it has averaged close to a 2% increase for the last 16 years. For comparison purposes (to your own personal circumstances), this is the"basket of goods" and the % weight assigned to each major category:
Depending on what, how and where you consume, there will be some discrepancy between your household spending and the above, but let's settle on 2% as a rounding number.
You are not going to be able to stay ahead of your increased cost of living by investing in risk-free assets at or about 1%.
How much risk do you have to take?
It does not take much to get the phone ringing off the proverbial hook (although these days it is mostly panic emails) at High Rock when volatility strikes and investors get a taste for just how much risk they have in their portfolios.
Needless to say, even a nicely balanced 60% equity portfolio felt the full impact of the most recent correction, let alone some of the 100% equity portfolios that have been knocking on our doors.
Even if you only read my blogs once in a while, you will know that what we do at High Rock goes much deeper than just popping our clients into a "one size fits all" balanced portfolio.
It takes a much greater amount of work and research to determine what risk is appropriate relative to each of your goals. That is why we do what we do. We want to make sure that we are upholding our fiduciary duty to our clients. That means that we must always be conscious of what risk we place you in when we build an investment strategy and why it is that we are taking that risk.
Your cost of living, which is very particular to your family, is a very important aspect of the planning process. The greater our understanding of that, the greater the understanding of what risk you have to assume to keep the growth of your money well ahead of the inflation in it.
Investing is so much more than gambling on a collection of companies future growth and cash flow. It is understanding why you need to take that risk in the first place and is that risk appropriate for you to be taking.
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist