Despite the fact that stocks (especially US stocks) have been in a bull market since 2009, we were reminded in the first week of February that, as an asset class, there is vulnerability to the potential of severe price swings.
If they can go up dramatically, they can also go down dramatically. Some folks are willing to take on that kind of risk, but others are not so comfortable when they look at their portfolio give up 5 or 6% over the course of a week.
And there may be more of it to come:
A 40% correction according to the co-President of JP Morgan:
As human beings we are conditioned to be very happy as long as things are going positively. When it turns and goes in the other direction, we tend to not be so thrilled. Some folks look at their portfolios daily, which is akin to driving with your nose pressed against the windshield, but they just can't help themselves.
Certainly it is good to have equity assets for growth purposes, but a balanced portfolio (with other asset classes) that are not correlated with equities will help alleviate the potential for the sleepless nights that accompany stock market volatility and the inevitable down-turn (markets just don't always go in one direction, they cycle, it is just natural).
So being a little less dependent on equities may be a necessity if you are going to want to continue to get growth when the downturn comes. It may have already begun.
The historically natural offset to high risk equity assets has been to balance them with a collection of high quality government and corporate (investment grade bonds). However, low interest rates have made those correlations less and less realistic (especially as inflation concerns, which erode the value of bonds, are climbing).
We at High Rock have found some alternatives over the last couple of years (because, surprise! we think that stocks are expensive) in other non-correlated assets for our clients: a collection of Canadian High Yield bonds that have had a better than 14% annual average return over the last couple of years, with less than half of the risk associated with stocks and an opportunity in preferred shares that brought a one year return of better than 20%. All of our clients have participated in these in some manner, depending on the structure of their asset allocation strategy (based on their goals as set out in their Wealth Forecasts).
And, no surprise, our client portfolios did not experience the heart-wrenching swings of traditionally balanced portfolios in that crazy first week of February.
Always remember that past performance does not guarantee future results, but at High Rock we work darn hard to provide our clients with the best possible risk-adjusted returns.
When stocks are sliding, you are going to want to have some other opportunities to rely on. When traditional bond assets don't provide it, what are you going to do to continue get growth?
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist