Shelter in Diversification

Shelter from the Perception of the Perfect Storm Provided by WealthCo Asset Management Market volatility is a fact of life. While there might be a perception that the combination of […]

Shelter from the Perception of the Perfect Storm
Provided by WealthCo Asset Management

Market volatility is a fact of life. While there might be a perception that the combination of rising rates, stock market volatility and politically induced trade friction is something new or the ‘Perfect Storm’, it’s neither. Investors need exposure to a well-constructed portfolio of equities that trade in the stock market and despite the current low rates, there is a place for higher quality bonds as well. What is more important is to focus on diversification and to keep the allocations to stocks and bonds moderate enough so that market events that we saw this week don’t nudge us off track.

Weather in the markets is political, and the perfect storm that has set down on global markets is no different. This week has seen the major indices take a loss of 5%, with the TSX reporting the largest single day loss in 3 years.

To highlight a few performance numbers:

• Between October 3rd and October 11th the S&P 500 was down 6.7%;
• From recent highs to October 11th the TSX 60 is down 7.1%
• Investors have taken losses in bonds as US 10-year rates moved from 2.82% to 3.23%
• Rising rates create losses for bonds already issued at lower rates

In short, with both stocks and bonds down the average investor had nowhere to hide.

With our focus on diversification our Medium Risk Portfolio has endured a correction of 0.6%.

Although reports coming out are leaning towards a stop in the steep decline by the end of the week, this storm has a story of investor fear in the stock market that may leave lasting effects. There has been much speculation as to the top three concerns that seemed to have sparked the sharp selloff, but little information regarding why there was no warning.

Tech Stocks – The general sentiment is that Tech is a risky business, and this week sentiment turned into action as the Tech Stocks that led the majority of the Bull market fell 4.8% – the largest drop in 7 years. Among the top performers with a serious decline were Amazon with a 6.2% loss, and Netflix at 8.4%. However, sometimes investors sell what they can, not what they should; and, most investors are more willing to sell winning positions than losing positions. There may not be a lot of information here.

US & China Trade Wars – When the two largest economies in the world begin a trade war based on power and control, everyone gets nervous. With New NAFTA essentially completed, many feel that President Trump will now focus the attention of his government on their trade relations with China. With weekly Tariff standoffs the confidence investors had just 12 months ago is gone, and this has only worsened this week with the statement by the IMF cutting the 2019 forecasted growth for both countries.

Rising Interest Rates – We have no choice but to be realistic – when the US raises interest rates, all Canadians (and the rest of the world) feel it. The cost of borrowing will increase for Canadians, and foreign goods will become more expensive causing increased Canadian inflation.

Finding Shelter in Diversification
At the end of the day, investing solely in the stock market is a risk – it fluctuates like the weather, and everyone continues to speculate and pontificate as to ‘why’. Asking why isn’t the solution – to shelter yourself from the increasing volatile global markets you need a diversified portfolio.

For years excessive volatility and inconsistent returns have been the central frustrations of investors. This is especially true for investors who are currently limited to stocks, which are often too volatile, and bonds, where returns are too low. Canadians have been highly exposed to the ebbs and flows of the Oil & Gas sector, and have taken refuge in Tech or more recently Cannabis stock as the solution – but to create shelter against volatility, investors need to hold assets in their investment portfolio that do not increase risk through the lack of a diversification strategy.

WealthCo portfolios are rich in allocations to less correlated alternative asset classes such as real estate, private equity, hedge funds, private mortgages and debt; and our size and scale gives our clients access to exclusive investment managers, larger real estate and private equity deals, preferential rates, and lower costs.

Our strategy for navigating global financial volatility is diversification, risk reduction and discipline. This is the cornerstone of our philosophy and investing model, and the reason our clients can remain confident that we will continue to work not to weather storms, but to plan and prepare for the shelter required when they hit.

If you have any questions or require more information, contact your trusted Catalyst advisor at 403-296-0082.