A case in point: our benchmark ETF ACWI (All Country World Index) opened at a new high and reversed course for a painful -1.5% yesterday. So if your "buy and hold" balanced 60/40 strategy has you at 60% equity, that is akin to a 0.9% swing in your portfolio (to the downside). About $9,000 for a $1mm portfolio. Meanwhile our benchmark bond ETF, XBB (Canadian Bond Index) was up about only 0.01%, which hardly offsets the move in stocks. We have been repeatedly discussing (for those who will listen) how these historical correlations are no longer necessarily reliable and suggesting a more tactical approach to reduce this kind of volatility. High Rock clients looking at their portfolios this morning are likely not too bothered by a significantly smaller move.
If those kind of swings (over 1 day) don't bother you, then you need not read on. If you happen to string a few of them together, however, it might make you squirm a bit because all of a sudden, your year to date returns are not what they were.
Of course, we do as we say and focus more on the longer-term returns and achieving client goals (per each client's Wealth Forecast), which over time, do smooth out the day to day swings. However, if you are human, you may lose a little sleep when you do look at your daily portfolio totals and they have dropped a bunch of $$.
Getting those $$ back (in a "buy and hold" strategy) also takes time, so you may also have to be a bit patient. If you have more cash in your portfolio, however, you not only defend against the downside (cash is a defensive asset), but you also get to take advantage of buying opportunities as prices move lower.
I am certainly not saying you have to move your whole portfolio in and out of cash, but just have a little more of a tactical approach (which we certainly have at High Rock. It may help you get to your goals a little faster or allow you to have a little more $$ in retirement than initially forecast. It might also help you sleep better at night.
Now how can you argue with that?
Yesterday we held our weekly client webinar which discusses our rationale in a bit more detail (so our clients can get a little insight to our thought process). The recorded version can be accessed here: http://highrockcapital.ca/current-edition-of-the-weekly-webinar.html Feel free to have a listen.
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist