Driving your investment plan

We’ve heard it a million times over the last few months - how we’re in “unprecedented” times, that we’ve seen “a fundamental shift” and that things will take months or years to get to normal.  For some, this has been a blip - maybe they already worked from home, so this was a small adjustment, and their income has barely been impacted. Some like essential workers may actually be seeing their income increase but most people have seen their workloads decrease and their paycheque alongside it. For those planning to retire in the next 3-5 years, they may have had to put those plans on hold, and it probably doesn’t seem very fair. You’ve been diligently saving, your advisor investing in one fund or another, and all of a sudden, your retirement is in jeopardy.  

I can’t tell you that there’s a way to never see your investments drop, unless you want to invest purely in GIC’s and other cash equivalents (spoiler alert, they generally don’t keep up with inflation).  Unfortunately, as we’ve seen in 2000 and 2008, and countless times before there will be times when the market drops. If you are investing, it is very unlikely you will never see a period when your portfolio goes down. What you can do is make sure your investment plan makes sense for you so that when there is increased uncertainty, it’s a bump and not a catastrophe. 

If you think about going to work (back when we drove to work every day), you got in the car that you had chosen because it was the best car for you based on your needs,  and took your set route to get to the office because it was, on average, the fastest way there. To be clear, it wasn’t the fastest way every day - sometimes there will be a car accident, or a lane closure, and you probably should have taken another route. Generally speaking though, this is the best way to get where you are going.  This is what your investment portfolio should be like - it won’t be the best portfolio every single day, but on the whole it will be the best route for you.

How do we decide this? There are a few factors to consider. If you have an investment advisor, you should have done some risk tolerance analysis when setting up your accounts (and this should be updated annually). This gives you an idea of how much risk you can take given your current situation, as well as how much risk you are comfortable with.  This is a good start.  Your advisor should also consider if you have any special needs/circumstances, such as shares in your company (concentration of your assets, may have selling restrictions), what your goals are (will you need access to large amounts of cash prior to retirement, how much do you need for retirement), if you have any special tax needs (if you are a dual citizen there are US tax needs to consider), among other things.  Consider this like finding the car that best suits your needs. Maybe you are young with lots of excess cash and a long time horizon so you can take higher levels of risk (getting a new sports car), or maybe you are near retirement and want to make sure your nest egg is protected (getting a nice practical vehicle with a strong safety rating).

Now how are we getting where we are going?  Regardless of the car you are in, the route you take will determine how enjoyable the drive is.  What is the investment philosophy you are engaged in?  Has your advisor explained their investment philosophy to you?  This is something people tend to spend less time on, but it is critically important. This will impact your whole portfolio, regardless of the other factors described above. There are a lot of strategies out there, with flashy, finance-y names, like “momentum strategies”, “factor investing”, “sector rotation” but if your advisor is working within a particular strategy, they should be able to explain in terms that make sense to you. If they can’t explain their strategy, that is a massive area of concern.  If they can explain it, but it doesn’t align with your values, it is also an area of concern.  An investment manager may have a perfectly sound strategy, but if it doesn’t align with you as an investor (for example, you are an average investor that wants to take advantage of the market without taking on excessive amounts of risk, and your advisor promotes concentrating on brand new industries and cryptocurrencies) you won’t be set up for success.  This is going to be planning the route to drive you to work - if you have not gone through these steps you may have a portfolio that isn’t aligned with your needs.

How do I communicate my investment philosophy? I don’t think market timing works.  If someone truly had the ability to guess which companies will outperform at any given time, and do so consistently, I don’t believe they will be doing this service for others for a small fee. They would be retired on a private island.  What I do trust is math and science.  If you look at markets over the last several decades there are a few common traits (or factors) that will tend to outperform others. I recommend to my clients that we gain exposure to the market as a whole in a low cost, low tax drag way; and simply to lean in to the factors that tend to outperform to take advantage of the higher expected return associated with those factors.  If you agree with this philosophy as a whole, then we can work through the rest of your profile as a client to create your custom portfolio and set you off on your drive.  The market, and those factors in particular won’t outperform every time (you will get the occasional traffic jam) but you know the route you are taking is the best route for you.

Finally, who hasn’t seen the lane next to them moving along while they are sitting still - changed lanes only to find now their old lane is moving, while they watch cars previously behind them pull ahead.  Your investment advisor is there so that when you want to change lanes, you can determine if it’s because your lane is closed ahead, or because the other lane is temporarily moving and changing will take you longer in the long run.  If your advisor isn’t providing this to you, you may not be getting the most value out of your ‘navigation system’. If you would like to discuss whether your investments align with your values, feel free to contact me here.

Elyce Harris is a CFA Charterholder working with Cornerstone Investment Counsel, a registered ICPM in Alberta, Canada.  She is also a licensed insurance broker in Alberta, Ontario, and PEI.  While every effort is made to ensure the accuracy of statements, errors may occur.  If a specific stat or carrier policy is cited, a source will be provided, however this is not done for generalizations.