Two common characteristics we see with our clients that have accumulated wealth is the ability to both assume risk, and the ability to stay the course during periods of volatility. Portfolio managers must have the ability to communicate this effectively to their clients and provide them the confidence that they are on the right path — even when this path becomes a bit rocky.
The Greenard Group model portfolio has never held speculative holdings and the focus has always been on large capitalized medium risk companies. We wrote an article on how we pick our stocks and it is this disciplined approach that pays the biggest dividends when markets get turbulent.
Market declines are a cleansing exercise for those who choose to speculate versus those who choose to invest. Many speculative investments often do not come back when markets get volatile.
Below are the annual percentage total returns (losses) for the S&P/TSX Composite Index, S&P 500 Index, and Nasdaq:
|
Year |
S&P/TSX Composite Index % |
S&P 500 Index % |
S&P/TSX Venture |
Nasdaq |
|---|---|---|---|---|
|
2011 |
-9% |
2% |
-35% |
-1% |
|
2012 |
7% |
16% |
-17% |
18% |
|
2013 |
13% |
32% |
-22% |
40% |
|
2014 |
11% |
14% |
-25% |
15% |
|
2015 |
-8% |
1% |
-24% |
7% |
|
2016 |
21% |
12% |
46% |
9% |
|
2017 |
9% |
22% |
12% |
30% |
|
2018 |
-9% |
-4% |
-34% |
-3% |
|
2019 |
23% |
31% |
4% |
37% |
|
2020 |
6% |
18% |
52% |
45% |
|
2021 |
25% |
29% |
7% |
22% |
|
2022 to June 30 |
-10% |
-20% |
-34% |
-29% |
Greenard Group’s top 5 market insights
Our top five items we can conclude on when we review the Index returns over time:
1) Avoid speculative equity positions that may not recover in times of volatility.
2) Selling after the markets have declined has historically never worked.
3) Recoveries are often very quick and missing the top days in the markets will impact long term performance.
4) Staying invested in quality positions is key as the stock market will always have an upward bias over time.
5) Movements in the markets can be substantial and the key is to be positioned with quality holdings to participate in those gains.
Here’s a bit more information on each of them.
1) Avoid speculation
We field calls daily from individuals who have read articles online and are inquiring about the latest speculative trend.
If we go back approximately a year ago, there were multiple speculative trends, some of these include: crypto currencies, cannabis securities, meme stocks and alternative energy. Nearly all these companies were extremely over valued and not even profitable.
Today, many of the names talked about are down 70 to 80 per cent — many will not recover.
2) Selling after market declines
Trying to time the markets is similar to speculation. It can be very humbling for the do-it-yourself investor who often gets transactions backward. Buying during periods of irrational exuberance and selling with the group of capitulators. We wrote a great article about trying to time the market.
3) Missing the top days
An interesting statistic relates to trying to time the markets and is best illustrated with an example.
If you invested $100,000 in the S&P/TSX over a 10-year period from December 2011 to December 2021 here’s what would happen if you were continuously invested, versus missing the 10, 20 and 30 best days:
|
How much would you have today if you invested $100,000 from December 2011 to December 2021 and: |
|||
|---|---|---|---|
|
Stayed continuously invested: |
Missed the 10 best days: |
Missed the 20 best days: |
Missed the 30 best days: |
|
$239,820 |
$147,180 |
$114,290 |
$93,420 |
4) Staying invested
Over the past decade in Canada and the U.S., there have been significant gains in the equity markets and many investors who have remained invested have reaped some of the rewards.
To give some perspective on how equity markets have performed, over the past decade one only has to look at the period between Jan. 1, 2011, to Dec. 31, 2021, where the S&P/TSX Composite Index returned a total of 118.96 per cent, the S&P 500 Index returned a total of 371.75 per cent and the Nasdaq returned a total of 570.60 per cent.
This represents an annualized compound rate of return of 7.38 per cent, 15.13 per cent and 18.87 per cent per cent, respectively.
5) Never a straight line
The interesting part about preparing a financial plan is that it uses a static, single assumption for a rate of return. It would be easier on everyone’s emotions if the returns were in a straight line every year — but that is not possible.
To be ultra conservative, we always use a four per cent rate of return within financial plans. The historical returns in the Greenard Group model portfolio are substantially higher. This rate of return is to be a conservative average for planning purposes, not what the return will be every single year. Some years, the returns will be substantially higher, other years it may not be.
Managing expectations
Education and experience help investors deal with fluctuations in the stock market. We spend time talking to clients about the emotional swings they will likely encounter over a lifetime of investing. Setting the expectation of this helps when you’re in the middle of extreme uncertainty. Every year there are events that result in people being concerned about whether they should be invested.
Over the years, we have heard people comment that this time is different. We have written over a dozen articles over the last couple of decades reassuring that this time is not different — we will get through this as well.
Kevin Greenard CPA CA FMA CFP CIM is a Portfolio Manager and Director, Wealth Management, with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250-389-2138. greenardgroup.com
