Chalten Investment Review Q1 2016

Welcome to the Chalten Investment Review for Q1 2016.  If you’re just checking your portfolio now for the first time since the beginning of the year, I’m sorry; you’ve missed all the fun!  A few days ago the headline across many financial media outlets read, “Biggest quarterly comeback for the Dow since 1933”. No doubt investors that flowed out of the market during the mid-February panic will either be kicking themselves or be pulled back into the market by exactly such fear/greed invoking headlines!  It does beg the question, though, are investors better off ignoring the market volatility completely, or staring it in the face and proving their discipline?  We think the answer lies somewhere in between.  You can’t completely ignore what’s going on in the market any easier than you can completely ignore other mainstream news.  People talk about it so to completely avoid it you’d have to totally isolate yourself!  We believe it’s better to arm yourself so that the headlines reinforce the confidence you have in your plan rather than reinforce the message from those spewing fear and greed.  As an enlightened and aware observer, you’ll be better able to ride through periods of market volatility.  How did you feel when the market kept falling through February? How did you feel when the Canadian dollar plunged to its lowest level vs the USD since 2003?  It’s times like this when the pundits are at their loudest and when you can’t help but feel like you must do something in response – it’s our natural reaction to want to act!  But if you stay the course and stick with the plan, it will serve you better over the long run.  Selling out during the discomfort in February would have left you missing the recovery.  Market movements happen quickly and the evidence shows it just doesn’t pay to try to time them.  You just have to stay in.  Legendary investor Benjamin Graham said, “The investor’s chief problem and even his worst enemy is likely to be himself.”  Self-awareness is critical because you are the enemy!   So step outside of yourself for a moment and ask how the headlines make you feel – then take a step back and say, “That’s interesting, I wonder why I feel that way?” Q1 provided a valuable opportunity to “practice” self-awareness because we rode the rollercoaster all the way down and all the way back up again.  How do you feel right now?

Q4 Market Review

To borrow an unattributed and overused phrase from English football commentators, “it was truly a game of two halves.” The Chalten Q4 2015 Investment Review was penned in the midst of a global market downturn and continuation of many of the trends we saw at the end of 2015.  Indeed, market volatility rose up in the early part of 2016 as asset prices collapsed, some blaming fears over global growth.  But oil and equity markets bottomed out and turned around quickly in February as those fears seemed to subside.  The US Federal Reserve, however, still seemed to be concerned enough to signal a slowing of its previously indicated pace of interest rate increases. This seemed to add fuel to the market comeback.  Most risky assets seemed to come racing back after the February market lows, none more so than emerging markets and commodity based equities.  Canada’s stock market benefitted on a relative basis doubly from its commodity weighted stock market exposure and the rebound of the Canadian dollar. 

  • In Q1 the total return on the Canadian stock market was 4.5% having dropped 1.2% in January but recovered in February and March.
  • In the US, the Q1 total return on the S&P500 in Canadian dollar terms was -4.9%, making a partial recovery from a -7.3% return through February.
  • The Q1 total return on the MSCI EAFE Index of stocks outside of North America was -8.9% in Canadian dollar terms.
  • The Canadian dollar gained more than 6% against the US dollar during Q1.
  • Q1 total returns for Canadian bonds were positive, and while they underperformed US and Global bonds in local currency terms, the strength of the Canadian dollar over the period meant that Canadian bonds won out for Canadian dollar investors in Q1.

Financial Planning topics of interest

On March 22nd the federal government announced the 2016 budget and addressed many issues relevant to Canadian investors.  In our Q4 2015 Review we highlighted some of the changes that had previously been announced such as the cut in federal tax on income between $44,700 and $89,401, the increase in the federal tax rate to 33% for income greater than $200,000 and the rolling back of TFSA contribution limits.  The government also proposed to clean up the way it provides benefits to families with children, replacing a lot of separate benefits with one Canadian Child Benefit which will be adjusted based on family income levels.  The retirement age for OAS will be rolled back to 65. 

Leading up to the budget there were rumours circulating that perhaps the government would try something unannounced and bolder such as increasing the small business tax rate to 26.5% or increasing the capital gains inclusion rate from 50% to 75%.  Thankfully none of these rumours proved to be more than that!  However, there are a number of small under-the-radar changes that might impact tax planning for small businesses and professionals including stricter rules around access to the $500,000 small business deduction.  Planned reductions to the small business tax rate will also be deferred indefinitely. 

Whether your finances are slightly better or slightly worse off as a result of the budget, we do have more clarity about what we can expect in the future from the government and how that will impact our ability to save and invest.  We’ll never get that kind of clarity from the capital markets but there are clear things we can do to help ourselves.  The first is to plan well.  The second is to stay disciplined.  To stay disciplined we believe it’s important to educate yourself and raise your awareness.  And again, we don’t mean you should know intimately the day to day ups and downs of the market and the fast moving opinions of market commentators but rather you should get to know yourself better.  Risk tolerance surveys are helpful to set you on the right path but ultimately they are no substitute to living through the real thing.  Q1 of 2016 gave us a great opportunity to live through a market swing in a short period of time.  With a good plan in place you can experience this sort of market volatility as would an interested spectator at a crazy sporting event! 

In addition to raising your self-awareness it always helps to regularly remind yourself of the well-researched and tested principles of an evidence-based investment approach:

  • Diversification
  • Low cost
  • Asset allocation based on risk tolerance
  • Disciplined rebalancing

The more comfortable you are with the approach, the more comfortable you’ll be with the market volatility.