From Gord's Desk

It’s hard to believe we’re approaching the end of the second year of this global pandemic. Despite the pain and loss endured by so many all over the world, I hope some positive changes have come from the shock we’ve all been forced to experience. As we look forward to 2022, despite continued uncertainty, I’m feeling a sense of educated optimism that’s stronger than ever before:

• Optimism in our fellow men and women, and their dedication to helping others.

• Optimism in our calling to elevate the lives and ambitions of our clients and their families.

Why? Because over the past two years, my beliefs have been tested more than ever. And they’ve held up.

 

When you’re entrusted with investors’ hard-earned money, as I am, it’s gratifying to see that the choices you make can lead to good outcomes.

 

So now we find ourselves at the doorstep of 2022, and we’ve just seen the S&P 500 and the TSX hit record highs—again. But not all investors perceive this as good news. Record highs make many people nervous, because they think that what goes up must come down.

 

When markets are working as they should, reaching record highs with some frequency is exactly the outcome we would expect. That makes intuitive sense, because if stocks didn’t have a positive expected return, no one would invest in them.

 

So, at the end of every year, we look back and forward. What do we think the next year will bring? I don’t know. No one does. Think about it: No one does. After these last two years, this lesson should be obvious to all of us.

 

Thank you once again for being my clients. It is a privilege to serve you.

 

I Cannot Take Credit for Being Right About the Markets

As I write this, the S&P 500 (U.S.) and the TSX (Canadian) broad equity markets are up around 25% (U.S. source, CDN source) each so far this year, after rising more than 14% and 1.9% respectively, in 2020 in spite of the pandemic.

 

While this is certainly gratifying, I cannot take credit for being “right about the market,” other than in the largest, longest-term sense.

 

My positions in the equity market are a pure function of their value to be a suitable investment vehicle to your lifetime financial (and especially retirement) planning. They are never based on a view of the economy and the markets, which I continue to believe can neither be forecast nor timed. Stated another way, we aren’t “right” because the market is up 25% this year, any more than we’d be “wrong” if it were down 25%.

 

Our investment policy is the same as it’s always been—even (and especially) when the market declined 34% in five weeks in February/March of 2020 (source). Simply stated, that policy is based on two enduring beliefs:

 

(1) That the historical long-term premium return of equities over bonds is

necessary to the achievement of your most important long-term financial goals.

 

(2) That the only way to be reasonably sure of capturing the premium return of

equities is to ride out their frequent but historically temporary price declines.

 

I cherish your kind comments regarding our recent experience. Thank you for

them. But in the next breath, be assured that I can claim no credit for anything

beyond making an appropriate long-term plan for you and your family, and

encouraging you to stay invested through thick and thin. This I will continue to do.

 

A Few Popular Investment Themes 

 

Here are two of the most common investment themes and questions I have heard from clients and investors over the past 12 months. They are not going away so I’m sharing my perspective on the following:

• Inflation
• Market Highs

Will Inflation Hurt Stock Returns? Not Necessarily!

 

Financial Journalism, with its deep emotional and intellectual commitment to scaring everyone out of the equity market, is always happiest when it can focus around one economic or financial “crisis.”

 

It may be inferred from the above that—with the issue of inflation— journalism has entered nirvana. It’s all inflation, all the time.

 

Investors may wonder whether stock returns will suffer if inflation keeps rising. Here’s some good news: Inflation isn’t necessarily bad news for stocks.

 

A look at equity performance in the past three decades does not show any reliable connection between periods of high (or low) inflation and stock returns.

 

Since 1991, one-year returns on stocks have fluctuated widely. Yet the weakest returns can occur when inflation is low, and 23 of the past 30 years saw positive returns even after adjusting for the impact of inflation. That was the case in the first six months of 2021 too.

 

History shows that stocks tend to outpace inflation over time—a valuable reminder for investors concerned that today’s rising prices will make it harder to reach their long-term financial goals.

 

None of this should be taken as a suggestion that mainstream equities are an efficient inflation hedge in the short run. They are not. No financial asset is. But as Wharton’s Dr. Jeremy Siegel concludes in his classic book Stocks for the Long Run, “In the long run, stocks are extremely good hedges against inflation, while bonds are not.”

 

All-Time-High Anxiety

 

Investors are often conflicted about record-high stock prices. They are pleased to see their existing equity holdings gain in value but apprehensive that higher prices somehow foreshadow a dramatic downturn in the future. And they may be reluctant to make new purchases since the traditional “buy low, sell high” mantra suggests committing funds to stocks at an all-time high is a surefire recipe for disappointment. Financial journalists periodically stoke investors’ record-high anxiety by suggesting the laws of physics apply to financial markets—that what goes up must come down. “Stocks Head Back to Earth,” read a headline in the Wall Street Journal in 2012.1 “Weird Science: Wall Street Repeals Law of Gravity,” Barron’s put it in 2017.2 And a Los Angeles Times reporter had a similar take last year, noting that low interest rates have “helped stock and bond markets defy gravity.”3

 

Investors should treat record high prices with neither excitement nor alarm, but rather indifference. If stocks have a positive expected return, reaching record highs with some frequency is exactly the outcome we would expect.

 

Humans are conditioned to think that after the rise must come the fall, tempting us to fiddle with our portfolios. But the data suggest such signals only exist in our imagination and that our efforts to improve results will just as likely penalize them. Investors should take comfort knowing that share prices are not fighting the forces of gravity when they move higher and have confidence that record highs only tell us the system is working just as we would expect—nothing more.

 

As a quick footnote, cryptocurrency is one of the top 3 clients enquires our team receives so stay turned for further updates in our team newsletter.