Chalten Investment Review – Q3 2018

Welcome to the Chalten Investment Review for Q3 2018.   In last quarter’s review we warned investors about how difficult it is to try to time the market’s up and downs.  The key to success over the long run is not “timing” the market but making sure you spend sufficient “time in” the market at your target allocation.  However, maintaining “time in” the market takes discipline and emotional fortitude, especially when markets are going down.     

We believe the following principles (from the high-level and timeless to the practical and ephemeral!) will help investors manage their emotions through times of economic and market volatility:

  • Focus on your long-term financial goals;
  • Set sensible expectations based on evidence – a good investment experience is driven as much by expectations as by results;
  • Worry about process you can control rather than outcome that you can’t – over the long run, a good outcome comes from good process;
  • Establish an investment allocation that you can live with in positive and negative markets;
  • Practice disciplined rebalancing based on your target allocation, not market forecasting or timing – market movements are out of your control, maintaining discipline is within your control;
  • Be diversified but remember that being diversified means you’ll always hate something in your portfolio;
  • Understand that market risk and volatility have to be a part of investing, otherwise the market wouldn’t reward you with attractive long-term returns;
  • Remember that the goal of the financial media and market commentators is to get you to do something, not to help you accomplish your goals;
  • Don’t look at your portfolio every day, week or even every month – any insight or trend you seek will be lost in the noise;
  • Benchmark your investment return, but try not to compare it to that of others – it’s difficult to differentiate skill versus luck especially over shorter time periods.

We could go on but further principles would just be derivations of the same basic themes!

Q3 Market Review

Global equity markets again were mixed over the quarter.  In the US, continued positive economic data and rising corporate earnings gave the Federal Reserve confidence to raise the target for the Federal Funds rate and guide for further increases.  US equity markets remained strong relative to those of other regions.  Canadian stock returns, on the other hand, reversed course from strong Q2 performance, dropping over the quarter, perhaps indicating continued jitters over trade as the September 30 NAFTA deadline loomed.   International markets were again mixed with Europe and Japan showing positive equity market returns while markets in Asia outside of Japan and other emerging markets posted losses for the quarter.  Notably in the face of increasing trade war rhetoric and tariffs, the Chinese stock market continued to significantly underperform the US market.   Again, keep an eye on this one to see if “Mr. Market” can help us write the Wall Street Journal in advance!  Bond yields generally rose and bond prices fell over the quarter.  The Canadian dollar strengthened against the US dollar.

  • The total return on the Canadian stock market was -0.6% for Q3 2018.
  • In the US, the total net return of the S&P500 in Canadian dollar terms was 5.7% for the quarter.
  • The total net return for the S&P Global ex-US BMI Index of stocks outside of the US (in Canadian dollar terms) was -1.3% for Q3.
  • The Canadian dollar regained 1.7% against the US dollar over Q3 leaving it down -3.1% against the USD for the year through the end of September.
  • Canadian bonds dropped by -0.9% over the quarter.

Financial Planning topics of interest

As expected, the Bank of Canada increased interest rates in July for the fourth time in just over a year to 1.5% but decided to hold rates steady in September.  As we write, we await an October 15 announcement from the Bank as to whether they will continue with further increases.  Rising interest rates will increase monthly payments for those with variable rate mortgages and lines of credits so keep an eye on your statements!  For those looking to refinance, new fixed rate mortgages will also likely see higher posted rates.  

In closing we remind investors that successful investing over the long run ultimately means eschewing the near impossible task of timing the market correctly but taking on the not impossible but very challenging task of managing your emotions and staying the course through all market conditions.  We hope the above principles will help make that task more manageable.