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Market 2021 Clinic Transcript:

0:00 So welcome everyone to our quarterly clinic, as always, I am Sandi Martin. I’m a partner here at Spring. It’s never changed! I’m clearly very good at hosting these things. Darryl Brown, of course, for those of you that don’t know him – I can’t imagine why you wouldn’t know him – we’ll get on top of that.

0:28 He’s the director of Portfolio Strategies here, and he has more than 13 years of experience in financial services. Prior to joining us here at Spring, he was the Director of Public Fixed Income for Sunlife Investment Management. Before that, he was a Senior Analyst for Dominion Bond Reading Securities in Toronto.

Darryl, of course as some of you know, helps our clients analyze their portfolios, communicate their investment policies, and is passionate about many things – one of them is guiding people through the noisy and often confusing world of investments. So with that Darryl, take it away!

1:03 Sandi, I’m also passionate about making webinars not boring! Good evening to everyone, if you have questions or things you want to address, please throw them in the chat or the Q and A. There’s prepared remarks here. There’s slides, which people who have attended before, you’ll see there are some familiar and some new.

1:25 The format is large and so we’re going to talk about what’s going on at the moment. Give you a little bit of my insight. There’s a little bit of investor ‘ED’ that we’re going to go through. There are things around behavioral finance investing errors which are fun! I am actually recording a podcast that should be coming out later this week about behavioral finance and investing errors.

What our clients are saying, which is, I feel like people are really interested in being a bit of a fly on the wall and in terms of what other clients say to us and you know what they’re concerned about.

2:04 Then we’ll finally kind of wrap up with – what did you do over these past 12 to 36 months or so? What should you do? Thoughts? And a Q and A. I would really love to leave it wide open to any questions. Comments that pop up throw them in and we can jump into them.

2:36 As far as prepared remarks go, let’s jump into this chart which is not a new one. As I mentioned, the first time that I put this together and the first time we started doing these quarterly presentations was just after the onset of the pandemic. I think putting this together, just helped me with this. These are sort of from my notes that I run in the background when I’m going through articles and going through research reports. Trying to just make sense of what was going on at the time, and what I think is still largely a fairly good picture of how things have progressed – going from a health crisis to economic contraction, to financial asset destruction, furthering economic contraction. And then you saw the introduction of monetary and fiscal stimulus – that being one of the key elements in providing some stability for both the financial markets, and the economy.

3:30 We’ve had that circle which could have been sort of the self-fulfilling circle, and with that stimulus, it helped. What I thought really separated out what was going on with the economy and what was going on with the COVID-19 pandemic vs what we saw in the financial markets. I think this was one of the key questions and things that had people scratching their heads, mid pandemic, was that we had this extraordinary impact on the global economy- It basically froze. How do you reconcile that with what was going on in the investment markets? While largely the onset of extraordinary monetary and fiscal stimulus from central banks and governments, not just in North America, but throughout the globe, it has really helped reflate financial assets and we’ve seen that continue through 2022.

4:18 It is not my expectation, despite a lot of concern about taking the punchbowl away, and tightening. Yes, the end of a lot of the extraordinary support measures is in sight. Central banks and governments are going to be very cautious about how they unwind a lot of the support, both on the fiscal side and the monetary side of things.

I kind of forgot when I started doing these Quarterlies that this (chart) from back in my institutional investment management days was one of my favorite charts. It still remains one of my favorite charts if we’re doing these quarterly calls in January. After the year end, you will absolutely see this year after year after year.

5:05 The Investment Quilt Of Returns and there are variations of these. I saw one with Bitcoin on there, and a few other asset classes. Just going with your traditional asset classes in this chart, I find it really helpful in just formulating thoughts around diversification. Mostly around how challenging it is to try and predict markets and the different asset classes. Hopefully, you can see things fairly clearly on the screen. Each of those different colors is representing a different asset class and shows the ranking for the individual years, then over the past 10 years. You can see, in 2020, you had large Cap’s leading the way as far as the asset classes that perform the best. Followed by emerging markets, mid-Cap and small-Cap. There’s TIPS – so Inflation Protected Securities. EW is an Equal Weight portfolio. Some of these charts show an equal weight, and some show a 60/40 split.

6:09 What a lot of these charts do, and some of the storytelling around it is around what that EW white box, which represents a diversified portfolio, does within the context of the different individual asset classes. The benefits of diversification, you can see, you’re not going to knock it out of the park in any single year within a Diversified Equal Weight Portfolio, but you’re not going to be at the bottom of the pack, like say, commodities through 2012 to 2015. For which had a sort of fairly miserable last 10 years and then whoa, they are basically number two in 2021 behind, to my surprise, REITs! Which snuck up to be number one. 

There’s tons that I could say, and I could hang on honestly on this track for like an hour, but really the point here being that we still encourage and believe top of mind that having a diversified portfolio does make a lot of sense. There are lots of different asset classes out there you’re not going to predict which one is going to be the top three year over year over year. You know, we can’t, our investment partners can’t.

7:16 This is why we believe in maintaining a diversified portfolio. Which means if you’re a do it yourselfer or rebalancing, not trying to predict or trying to chase after any of the asset classes that may have performed well recently. Maybe you’re kind of a reversion to the mean person, so where you see something that hasn’t performed well in the previous year and you jump into it. I think a lot of those points of view are a challenge to make your investing experience successful. So yeah, the Quilt of Returns – you’ll see this one again. Any questions? Throw them in the chat!

7:56 [Sandi] Sorry to interrupt, it looked like David had a question whether that EW stood for 60/40 or something else?

8:04 That’s if you took the different asset classes. Great question! That’s if you took the individual asset classes and then you just split them sort of equal across the 10 different asset classes there. So just one 10 percent, 10%, 10% across the board. That’s what that ‘EW’ represents. So, not a 60/40 in this case.

8:31 Next page – everyone’s favorite topic in 2021 continues to be hot because you see these giant inflation prints. No doubt, they are substantial. Inflation, no matter where you are or how you measure, is running very high. Like I’ve said in previous sessions, I think one of the misconceptions with inflation is that people hear the number and then they believe it’s that number for forever and forever. Bear in mind inflation, as it is measured, is a year over year comparison. This is something that gets missed all the time and it drives me NUTS! You’re comparing the price Indexes right now to periods of time where our economy was largely in lockdown, so yeah, you’re definitely going to have base rate effects. Meaning that you’re comparing it to a very depressed point in time and we’re seeing very high inflation prints. 

9:28 There’s this conversation and debate about whether those are long-term sustainable Inflation numbers, if they are “transitory” – and for sure I’m in the transitory camp – that doesn’t mean inflation is going to drop right back down to 2% or the 1.8% historical average. I think it is going to be a little bit sticky. I think we’ll continue to see inflation prints which are above average but I don’t think you’ll continue to see some of the more extraordinary prints that we’ve seen in more recent quarters.

10:00 With inflation, there’s a lot of talk about two components: How do you get prices to rise as the demand side tanks? So money chasing after a limited supply of goods. Then there’s what’s going on with the limited supply of goods. I really do feel, and kind of provided my comments, it’s more on the supply side of things. Where you continue to have supply disruptions, you continue to have the impact of the pandemic impacting you. Supply chains’ prices for goods, labor. So you could see inflation above multi-decade historical averages. By no means do I think five or six percent represents a number that we would expect over the next several decades. Investment players and financial players readjust inflation in their plans. That is something each year, we take a look at our investment rate of return assumptions are inflation assumptions. I definitely think there’ll be a revision to it but we’re not going to revise from our previous 2% and triple that or double that.

11:16 I think there is definitely consideration that it could inch higher. If people are wondering how these inflation prints are impacting how Spring does financial plans and how we think about inflation – yes, an impact, but like I’ve said before: inflation – yes; reflation – yes; hyperinflation – no.

This chart, again a repeat from previous decks where inflation is coming from – a lot of sectors that were abnormally impacted by the pandemic: used cars, vehicle, airfare, hotels all had pretty nasty base rate effects. Meaning, during the pandemic, a lot of these services were not used, locked down, prices really reduced and so you’re seeing that reflation in those sectors, particularly hot. Again, showing the same thing – lodging, airfare, household furnishings, used cars and trucks – so all of that to say, I think inflation is going to continue to be something that you hear about, but I don’t think it’s something that requires an urgent or a frantic response that sometimes we see with inbound clients. They are extraordinarily worried that inflation at four or five percent is going to be that way for multiple decades in a row. The purchasing power of their household finances – yes,a factor, but something that we think should be kind of talked about in a bit more moderation.

12:49 For those who are nearing retirement, looking for stable sources of income, there’s nothing great to tell you about what’s happening on the fixed income side of things. That is a very weak interest rate environment. We’re seeing some reflation in bond yields, more so on the middle and short end of the curve. But you know, you still have a very weak bond environment. It doesn’t mean that you should stay away from bonds altogether, they still represent an important component of a diversified portfolio. Definitely something to keep in your portfolio, but bear in mind that they’re going to have challenges. They’ve already had a very challenging year as you saw from the previous quote. They were near the bottom of the pack, if not at the bottom of the pack, so they’re going to be challenged. And in an environment where you have inflation creeping higher, and for which investors are starting to rotate away from bonds just a bit. It’s not an asset class that we think should be completely tossed out the window.

13:53 Bruce, I see your question on professional discretionary portfolio management. It’s something that we think is a great option for a lot of people. Not everybody’s built to be a do it yourself investor, I think a lot of the commentary over the last decade or so has been – it’s all been the same so it’s all going to trash active investment management.

14:20 To be clear, what I think is a valid criticism of the active and discretionary portfolio management space had been investment managers, which did something called closet indexing, where they would hold names and relative amounts that were very similar to indexes – there wasn’t a whole lot of creativity or conviction when it came to deviating from the benchmark, the natural makeup of the investment markets out there.

Valid criticism, and I think now, sometimes I see the opposite, where I have clients with discretionary managers who have zero conviction – they have all of these names, like 1000 names, in a portfolio just held at very tiny amounts. I think that it’s very difficult to provide a wide range and comment on discretionary managers. It really depends on the manager and depends on what you’re looking for as a client.

15:24 I really do think about discretionary managers or any investment manager, who we refer to as a partner. It’s not any different from a relationship. Someone you’re dating, marriage. It is really a partnership – finding a good fit is key. People who you interact with, client services, and the style of investment management are all super important. You find outstanding discretionary managers out there, then you find investment managers who you’re scratching your head why anyone would pay them 2% to manage funds in the manner that they do. I do think that discretionary managers are a great fit for a lot of clients. We definitely refer clients to discretionary managers.

16:09 We also recognize that for a lot of clients who are very informed that they could be on the right track to holding a low fee passive investment portfolio. If they avoid some of the mistakes or behavioral errors that I’m going to talk about in a second, that can be an outstanding solution for them!

16:27 So here we are – behavioral finance. It is really the study of the influence of psychology on the behavior of investors or financial analysts. It is a massive area if you don’t know about, or have not heard about it. This is the area that I think is key to investors being successful. And success, not meaning you’re going to or are expected to outperform the markets. Success being, an investment portfolio which is suitable and in line with your financial objectives. That is key to investment success.

17:08 There is a lot of ambiguity around the different areas of behavioral finance. What’s really interesting is that a lot of people focus on the quantitative aspect, and not so much the decision making. How people invest, what are the common things and errors that we as people are wired to engage in and go down rabbit holes. As a spoiler, we’re as people, wired to be crappy investors.

So I’ll give you a few – and this is by no means an exhaustive list of investing errors – but just a few. And I definitely encourage, especially if you’ve got experience investing and you feel comfortable with the terminology, the investment products, none of that is super intimidating – hanging out with a lot of the behavioral finance phrases, I think, is really interesting and can be really helpful in guiding people to being better investors themselves or better clients. I’ve talked about portfolio islands in some of my presentations. What I have meant by this and, this is an opportunity to expand on this.

18:26 I think it’s a big error. It’s a behavioral one where people treat their investments like they’re this separate thing and separate pot of money, that is there to make money and there’s no context. There’s no reference to any type of financial plan, no context or reference to any type of financial objectives, and I think this is one of the most common things that I see in errors that people are making. They’ve got an investment portfolio, and I’ll ask some clients “What is it for?” and ‘it’s to make money’. “Well, yea, but what’s it for, what is the purpose of it?” and a lot of people aren’t very good at articulating that. Whether it’s actively managed, if you’re handing your funds off to the investment manager, or you’re doing it yourself, please do not treat your portfolio like an island. It has to have some connection to whatever your objectives are. 

19:21 Availability bias – It’s a very broad error that appears in financial services. I’ll give you one example of it. I’ll hear this from clients “Oh, I was talking to this person and they earn 28%, 34%, or 42%.” What they’re being provided – the availability of information and consequently their understanding, or the belief of what reasonable investment returns are – is influenced by the information available. What they don’t hear are the 999 investors for the one that is speaking out who lost money or barely broke even.

The bias again – availability bias is really referring to how the availability of information and how skewed it can be at times. It really does affect people’s beliefs and perceptions, so that’s just one example.

20:18 You can hop online and go through lots of really fun rabbit holes of the different ways availability bias can really impact your understanding, your emotions around your portfolio and perhaps even your investment returns. It’s really quite an interesting area.

FOMO and herding mentality – this probably doesn’t need a whole lot of explanation, but we see this all the time with investors. They’ve got to run into the hot sector, and there’s always going to be a hot sector: S-Packs, Cannabis, Cryptocurrencies or whatever. You see this very frequently. What is kind of interesting right now that’s happened most in more recent months is there’s almost this FOMO and herding mentality appearing at times in the opposite direction. At certain points in time we get clients that are like “I gotta get into the market.” Now we’re kind of hearing, over the last of the six to 18 months, so many clients who are like “I gotta get out of the market.” or “I’m already out.” They are really panicking about capturing some of their investment returns. Our advice in all these cases is really boring. It’s asset allocation, it’s understanding and having a plan and really sticking with it. It’s kind of going to be our advice for a lot in terms of how to avoid a lot of these various errors.

21:45 Self attribution bias. This is a great one and so classic. Probably moreso, a dude thing. Portfolio goes up, “Oh hey, I had great investment picks.” “My portfolio did well”. “My portfolio is great.” Markets went down, “Bad luck!” “Oh, the markets were bad, that’s why my portfolio’s down.” All the time, constantly and it’s something to be aware of as an investor, that you’ve got to look at the makeup of your portfolio objectively, your analysis, and how you attribute both losses and gains – it’s got to be symmetric. You’ve got to just pay attention to how you’re earning your returns and don’t make that error.

22:36 Overconfidence! Another fairly easy one. We see this all the time. Investors say that they are going into this specific investment or this area and they are sure as night comes after day that they’re going to earn money because that’s how it’s happened in the past. Overconfidence is very closely related to the illusion of control, and they are two killers for investment portfolios. I think a lot of people going into investing, whether doing it themselves or not, need to be humbled by the fact that no one, not me, not the pros, no one can predict where markets are going. The best way to prevent overconfidence and the illusion of control is to really understand that investment returns and how markets trade, investor psychology, market prices – are ALL very unpredictable in the near-term.

23:41 Trying to chase after those investment returns, or trying to predict market tops or bottoms, is extremely difficult. If it happens to work out well for you, it could be due to luck. It’s very difficult to repeat. Those are some things to be aware of as investors, in terms of things that can affect not just your own decision making, if you’re doing it yourself, but also your relationship with your investment manager if that’s the route that you’re going. 

24:15 Stay away from all of these. I don’t have a whole lot more to say about finding investment information. I hang out on all of them a little bit, moreso Twitter, but the other ones just aren’t anything great. The issue that I have with any investing information that’s showing up, just about anywhere, is firstly, it’s really difficult to understand the context for the information that you’re seeing. Then, even if you can understand the context and verify its accuracy, is that information even relevant to you as an individual? There is so much general information out there, not enough insight. Not enough people who are providing that information, who can recognize that it’s the insight and the personalized nature of what you’re talking about that’s important when it comes to investing. I hang out on Twitter and there’s a few good things going on there, but social media and investment information is becoming more and more of a challenge to try and sort of steer people away from things that they’re reading. 

25:20 Getting them to sort of stay more grounded, and understand that there are things that they can control, and understand that there are solutions and ideas and there’s a path for them that is going to make sense,and it’s going to be different from each and every person. That’s my quick throw-social-media-and-investing-information under the bus rant.

25:49 What our clients are saying. This is also something that appears quarter after quarter and for me, just know that I find it interesting too. Because I think people can kind of forget what has happened and how quickly things change. Almost two years – we’re coming up to two years – where people were, I think, actually, I was surprised back in April 2020, that we had a lot of really informed, pragmatic clients are saying ‘hey there’s a bit of a pullback, iIm going to rebalance, I’m looking to take advantage of this correction.

It was actually fantastic to see! It was a pleasant surprise, and you’ve gradually seen investor psychology kind of ‘push push’ and the focus on inflation has crept up and it’s been something that, yes, you’re seeing it in the media and play out in conversations everywhere, but yes, people are bringing those concerns to us, to our investment management partners. But, where I think they are – again, going back to my earlier comments – where I think that things can improve, is understanding that these are not forever and forever numbers. Yes, they may run higher than average, but a lot of people are making that error and there’s a lot of people who are a little bit frantic about this.

27:19 So what did you do over the last 18 months, 24 months? DIYers, to be honest with you, we hear from them a little bit, but not a lot. I think the DIYers are very much not looking for second opinions – which we provide, whichever you want, you can just let us know to provide you a proposal and a quote – DIYers, I can imagine their portfolios are just sort of all over the place. It is extremely, extremely difficult. If you are a DIYer listening on the call right now, just know that I think people, year after year, say that this is the hardest the markets have ever been,this is the hardest market spent. Like it is really, really hard out there to try and not only make sense of the information that you’re hearing, which is constantly extraordinary, but then trying to even think about how investments and markets may respond to that information is wild.

So it is very challenging out there, so one of the pieces of advice that I do have for DIYers is focusing on understanding what your benchmarks are for success. It’s very easy to get spun around by what’s going on the markets, or what this investment class is doing, and I hear people say ‘oh, my portfolio did great, it earned like 8%’, and I’m like ‘well, the rest of the market went up like 13.’ So it’s figuring out what your benchmarks are, like how you gauge success is incredibly important. And probably one of the few ways that’s going to help you stay on track. People with robo advisors, (hopefully you left the robots alone to do their thing and do the rebalancing as that’s what you’re paying them 35, 40, 50 basis points to do), leave them alone, let them do their job, and you know that generally will turn out to be as successful a relationship that you can have with a robot. And managed portfolios – just make sure that you’re with the right partner – super, super important. I think the last year and a bit has given people a chance to get a sense for – it’s not when markets are going up that your relationship with your investment manager matters, it’s when they’re going sideways or down, you know – how is that relationship? Are you and your portfolio where they should be as far as risk, and are they aligned with your objectives? Do you need to take on all that risk? 

29:50 All these questions, I think, are ones that should have been popping up in people’s heads over the last couple years, and again, continue to evaluate that. Do you need to take on risk? Can you de-risk your portfolio? Use some of the investment returns that we’ve seen over the last few quarters to perhaps take some gains. And I can tell you that’s what our investment managers are generally doing from what we’ve heard, they are using the strength of the market to sell into that strength. And they’re looking at prices, and being opportunistic. So that’s something that I think individuals should consider or even if they’re managing their investments themselves, or expect having their investments managed for them.

30:39 This chart has not changed. Boomers – retirement planning, and again, just following up on de-risking. Gen xers – retirement planning, it’s stress testing, its asset allocation. Just giving those a good shake around and seeing if they make sense. For Millennials – it’s hard, you may have had cash ready to go, and may have been sort of spooked by what you thought were high prices and then the Q3/Q4 plays out and you’ve let 9% kind of go away.

And so it’s a challenge, but I think for the younger investors out there, focus is on your cash flow, focusing on time in the market, as opposed to timing the market – really, I think those are those are key things. And for Gen Z – it’s really sort of the social media aspect of it, where they’re getting their information from, just making sure that they’re challenging those and making sure that they have a broad sort of scope of where they’re getting their information from. There’s lots of really good information out there and I think what’s great about the media environment right now, is that you have access to a lot of different voices. But the problem is you have a lot of access to not helpful voices out there, so I think that’s just something to keep in mind for any younger investors who are on the call now or that you might be chatting with.

32:16 And thoughts, sort of top of mind. I wouldn’t say these are top of my things, but these are things that I think about sort of like on an ongoing basis.

Not forgetting about the trade war – and this is one I’ve had in there consistently – I think it dovetails into supply side issues and again, could be a reason why inflation, while it may not be as drastically transitory as some some people might be talking about, I think it will cause inflation to sort of linger and hang out a little bit higher than average. Again, not the 5,6,7 prints, but  you could have inflation that runs a little higher than historical averages – again, historical averages being around 1.8% or 1.9% in Canada. So, if you’re at low twos, mid twos, even high twos – like those are really high increases compared to previous decades, as opposed to the more sensationalized numbers that are out there. So, like you’ve heard me say: inflation – yep, reflation – yep, hyperinflation – no. 

33:23 We’ve talked about portfolios as an island. Keeping in mind, just on an ongoing basis, the stock market is a reflection of what investors are willing to pay for an asset or stream of cash flows, it’s not a reflection of the real economy. Weird – I think I put this down because this sort of contrasts from maybe some of my business degree learning things which is – investments reflect the economy and etc, etc, and I actually just don’t think that’s the case anymore. I think they’re very different and they might be casually connected.

But because of the massive monetary and fiscal stimulus that we’ve got in play, there’s really not a massive connection at this time and I don’t expect it to change. How that might affect you, as an individual, hopefully help you to avoid these connections between, say, the economy reopening and maybe the expectation that investment prices or asset prices will also improve or reflate. Just getting rid of that casual sort of cause and effect connection between the economy and asset prices, I think, is going to be extraordinarily helpful. 

34:39 Time in the market, not timing the market. And finally, central banks and fiscal stimulus – is it the last call? I don’t think so. I think policymakers are going to be very cautious about how they unwind the stimulus and I think if there is a bias, and I think if they’re going to risk doing something, it’s going to be risking a little bit more inflation – which is a good thing in the system. As opposed to deflation, which you don’t hear about, but it has happened in very brief periods, and it is an incredibly, incredibly nasty risk for highly indebted households and governments. So if you want to see something kind of really scary, like I look up super indebted sovereigns and households and what happens when prices decline. I can assure you, central banks and policymakers do not want that combination – so last call, probably not. I think we’ll see a lot of continued support for some time. So that’s it! 

35:52 I see some questions – I see one from Sarah right now, but if you’ve got any, we’ll take a quick second because there was a lot in there! I’m going to grab a sip of water and we’ll jump into some questions in a moment.

Sarah, I’m just looking at your question. I’m reading it a second time. If we ever give Boomers or Gen Xers advice that incorporates Gen Z advice, so looking ahead to their kids’ inheritance. I think the short answer is I’m not sure. That’s a good question. I’m not sure how to answer that one in the way that you’ve sort of presented it, but I hear Julia who is off perhaps. 

[Sandi] Oh, I allowed Julia to speak so if Julia wants to add any insight into this, I will say that it happens, for sure, that we talk to clients. And we’re not just talking about their needs, it’s kind of – Darryl, it goes back to what you had said about ‘what does your portfolio need to do for you.’ And so, one of the things that many of our clients say is ‘our portfolio has to do the things it needs to do for us, and then it also has to do the things that we want to gift to our children or create a family legacy for them’, and so of course there’s this element of dealing with the parents’ time horizon and suitability of your investments and all those things, and then we also are looking at – and Darryl, you can speak to this I think – we’re also looking at the competing longer term kind of permanent portfolio in a way, for these kids who are right now only 12, 15, 22 years old, and now have a further 70 years of portfolio management for them. So maybe it would be a split between how do we look at a portfolio that is one portfolio, but has to do the older parents’ lifetime and also the younger children’s, you know, that family legacy for them. Does that make it a little clearer for you?

38:19 Yes, yes. yeah I think. Absolutely, I think. So, for each of the engagements that we’re looking at and the people within those engagements, and the family members in there, you know the interconnectedness, understanding generational wealth transfer, understanding what the needs are across the different generations – that’s most definitely a point of view that we take. In addition to looking at the individuals and their specific needs kind of within their lifespan, so it’s a sort of multi-perspective approach, but for sure we do take that into consideration.

[Sandi] And then we have this very interesting question about regardless of DIY or not, what an appropriate time horizon might be to think about ‘Okay, well in the last six months, how has performance been, or should it be in the last three years, or should it be over a five year, 10-year horizon? What’s a good window to look back on and say, yes I got good performance or no, I did not get good performance?’ 

39:32 Very good question! Unfortunately, I have a personal finance person answer: it’s like it depends. I really don’t pay attention personally, and kind of professionally, to returns shorter than a span of say, three to five years. Year to year returns, I think, are useless to look at and to make any type of reasonable investing decision about. I think they’re helpful to know in any given year, but just the way portfolios work and how they’re composed over time, the individual company selection strategies – those can seem to kind of not play out and then all of a sudden they do, after two or three years. If you were to make an assessment ahead of that time, it might be a little bit premature. The time horizon will depend, as well, on the asset allocation or how aggressive the portfolio is. On one extreme, if it’s a portfolio full of very short-term bonds, like your time horizon is obviously going to be very short-term, you’re not expecting a whole lot of volatility. A portfolio chock full of equities, again, you can sort of check out what the returns are year to year, but really when you’re holding onto investments, I take a very long-term time horizon. Like I’m a 10 year or more investor. So if I invested money two years ago and I’m in the red on a few positions, I don’t care. It’s just that I’ve chosen positions in the case that they’re not performing well or if it’s a fund that’s not performing well, understanding why that might be the case, understanding why and how that fund still integrates with the rest of my portfolio, how it integrates with my financial objectives – those are the key things. And if there aren’t any massive fundamental changes to my objectives, and to the why behind why I picked that investment – then it’s going to stay there, and arguably it would be an opportunity to perhaps rebalance in there. So it really depends, but I’m someone who thinks about investments in a 10-year and greater time horizon.

41:50 [Sandi] And then another very good question about generationally being a Boomer, where would you invest surplus cash?

It depends. There’s not a wide sweeping answer that I could provide to someone who’s a “Boomer”. It’ll absolutely depend on what your financial objectives are. Unfortunately John, can you provide any more context around that? Because it’s really going to depend on your financial objectives. Give it some thought, if there’s any follow up you can provide, I can definitely follow up with an answer there, but it’s an ‘unfortunately it depends’ answer for now.

David – since the interest rate increases to housing prices is down 33% – I’m not in the weeds on housing sensitivities, correlations etc., but I feel fairly confident in saying no to the price is down 33%. I think the Bank of Canada has a very good understanding of the sensitivities to individual households, going from 1% right now – which, I renewed my mortgage earlier this year and I was like ‘1.35% wtf sign me up! Great, let’s go!’ – you’re going from 1.35, if you go to two, two and a half let’s say, so now up a hundred basis points or so, that’s still incredibly low!  I can’t see that bringing prices down by a third – I think you’d have to, you’re still in the comfortable zone, even at these incredibly, incredibly, incredibly like – it’s basically free money! Like 1%, 0.9%, 1.6% – is all kind of free ish for me, so going up a full  hundred basis points, I don’t think it’s going to tip housing prices in that direction. I think there could be a few people and a few purchases, a few deals on the margin that are maybe not going to do well, but I think that is far too much.

44:10 What do I think could bring down housing prices at this point? It’s a really good question. I think we just, sort of socially, policy-wise, have really coddled the housing sector. It has, admittedly, I think, provided a lot of economic support. I don’t think policymakers are really going to want to meddle with that. If you were to mess with, say, down payment requirements going up, from say, you can get it at five-ish percent right now, and if you were to increase that significantly, I think that would place downward pressure on the housing market. But I don’t think down, one third percent, I think you could go past 4% before you start to see some moderation. Like, to about 4% for you to see any moderation, but again I’m not a housing expert in terms of where the sensitivities are, but I do see what I think is really interesting, just in terms of a pricing standpoint. We’re seeing Toronto and Vancouver being the front runners and housing price appreciation be replaced by The ex-urban environments. Your Peterboroughs, and your Lindsays and your Collingwoods, your Prince Edward Counties, everything – everything that is not a massive urban center is showing these fairly impressive price increases. I feel like that’s a telecommuting reflection, and urban centers using a wackload of home equity to go out and kind of be mortgage-free, or as close to mortgage-free as possible, but even with that transition from urban to outside, I don’t think it’s going to knock the headline prices for those markets out of the water.

I think – I can’t see a third. I really can’t, and if there was ever a risk, you’d see the Bank of Canada come running out to coddle the entire housing market. Stable 5%, over the next three years – I wouldn’t be able to provide you a specific answer, anything can happen in three years.

And this is an answer to John: three years is a very short time horizon. if you go three years and a combination of mixed equity fixed income because it’s such a short time horizon, you’re subject to market volatility. That is way too short a period to see a full market cycle, whatever that is nowadays. So, again, I wouldn’t have a very specific answer for you in terms of 5% returns over such a short time horizon. Longer time horizons, you know we would see, again, nothing fancy. But you have a portfolio which is perhaps 70% in equities, or a fairly assertive equity position and that would be a reasonable investment return assumption over a much longer time horizon. Three years – I know people like to go on and I feel like the entire investment management world likes to talk about their price targets for like one year or two years or ever. And I think it’s crazy. I just don’t get why they still go hang out and be like this is our price target for a company in a year, I feel like you’re owning investments – for me, you’re owning 10 years or more, and if you don’t feel like that investments going to, if you’re looking for something in a shorter time horizon – for me, you’re just subject to a lot of volatility in that timeframe. 

48:11 How do we advise our planning clients to think about their house. Should they consider it part of the accumulation strategy, sell, reverse mortgage or not? This is definitely moreso  a Sandi Martin sort of answer. [Sandi] Oh, throw me under the bus! [Darryl] Sorry!

No, no, no it’s – we deal with this all the time, and of course – it depends. That’s always the financial planning joke, but it really does depend. Well, what does it depend on? It depends on: do you need a place to live for your whole life? Typically, the answer is yes. Do you have an extra house? In which case, yes, one of your houses, one of your properties could theoretically be considered part of your retirement income strategy or decumulation (which is just a fancy word for taking money out of investments, instead of accumulating). Often, we’ll try – unless a client has really strong – so, for example, we’ve had lots of single lady clients as it happens, who look at their house or their condo as the single biggest asset that they have and don’t have kids and don’t intend to leave a whole whack of money behind them, and so we certainly have used their home. For example in BC, we will often run scenarios where we illustrate the benefit of – sometimes it’s not a benefit – but the benefit of different property taxes, under that program, so that they have this simple interest loan that builds up against the value in their house, instead of spending cash from investments on property tax, they just borrow it from the province. That can work for them. Or, some people do use a reverse mortgage – much less frequent just because the reverse mortgage product landscape in Canada is very different than in the states where a lot of the series and academic information about reverse mortgages – there’s just a lot more, and a lot cheaper, and easier to use reverse mortgages in the states. So, again, in those cases, what we try and find is the balance for clients who do look at their house as part of their overall asset base and don’t want to leave anything behind. We are looking at the balance between ‘okay, end-of-life care’ which, again, we know can be (especially even in these times as illustrated) you know your values around end-of-life care and therefore the cost, they have to squirrel away against the possibility of having to spend money on that.

Sometimes we reserve the house for that – to pay for some kind of nursing inside of an institution of some kind. But very often, what we try and find is ‘you don’t have to sell your home where you live in order to live comfortably for a very long time, and if you choose to sell it and downsize, well, that just makes things a little bit better.’ But it’s very rare that we’re going to build a plan that depends on somebody selling their house at some point, even to downsize because, as much as people say ‘my house is too big and I want to downsize when I retire or when the kids move out or whatever’, in actual real life practice, many people do not do that. For emotional reasons, or any of any number of other reasons, but we often find that people who say they’re going to do it don’t actually do it. So to build a plan that depends on that, we found it to not be practical in most scenarios.

[Darryl] Thank you, Sandi. 

[Sandi] My pleasure.

51:43 I also feel like, is it fair to – do you have this sort of opinion as well, to where do you feel like downsize trade has been way tougher to actually implement now? Just the way the prices have – yeah, they’ve all trended higher, but I feel like nowadays it’s ‘yeah, you can sell your semi-detached or your home’ and then you’re downsizing into it and then you’re like: ‘that’s also really expensive!’ It’s like everything just feels kind of expensive and I don’t know if we were – I don’t know if it was available at some point, but I really feel like it is much harder to do that.

[Sandi] Yeah, I think that’s a combination of a couple of things, but one thing that I don’t think really gets considered when people are looking ahead to downsizing is the fact that you know, when you’re 30, and you’re looking to buy a house, and you can look at things – I’m sitting in a room right now that doesn’t have a whole bunch of stuff it’s supposed to have – because we’re, yeah i’m not 30 anymore, but it’s like, ‘Okay, well, we can put the trim up at some point and we can refinish the floor’ and when you’re older and downsizing, you’re not looking for a house that has some fixer upper elements. You’re looking for a house that you can just move right into, unless you’re a very particular kind of person. But with prices and markets the way they are, unless you’re willing to move to an entirely different – in some cases, less desirable market – what you’re looking at, it’s not downsizing. What you’re looking at is downgrading, and not a lot of people are willing to do that. They get used to a particular comfort level in their home, a particular closeness to amenities, and their location is important to them, because of their family and friends and all those things.

So it’s a much more constrained choice that older people are making when they’re moving house that I think younger people can afford to make and to actually make. You know you know what we’re willing to live with. That’s it, that’s all I’ve got. 

53:40 It’s fascinating. The home prices are – we all pay attention to this stuff, I think, on a regular basis, because it’s part of our jobs. My mind is like, I’ll see stuff and I’m just mind blown all the time! There’s somebody who has a thread out there on Twitter, which it goes through – and i’ve gone through and actually verified – a lot of these homes sold kind of middle of the pandemic – a person has done nothing, then six months later it’s selling for 1.4m, purchased for 800K six months before in Bowmanville, Ontario. Like wow! It’s just really, really crazy. I have a lingering sort of whatever about housing, and as I’ve seen this pop up – I don’t know if it’s going to happen – is if they’ll challenge the sort of blind bidding war thing that happens, which I think is insane. Like the way real estate agents do it.

Not a criticism to them – they’re doing a job and those are the rules – but I just wonder if that’s not going to come under pressure because with that system, you’re using a single person’s or a single deal’s final selling price, and it might be totally insane, but that becomes the new comparable for the the area or whatever. I don’t know, I can’t imagine the industry would want to succumb to that, not having that there, but if there’s something that could help, again, I don’t think the real estate prices are going to go down significantly, but perhaps moderate through a combination of a few different policy things and maybe a little bit of interest rate increase. Yeah, maybe we could see some moderation, but this one third thing – I don’t know and I don’t think so. [Sandi] Yeah, I think it might take a lot more than interest rates to make that happen, eh? [Darryl] I think so, yeah.

55:44 [Sandi] Well, I think that’s all we’ve got. Is there anything else, Darryl, that you want to add, that came up before we finish off for this evening?

[Darryl] Not particularly, but it is you know, just staying hopefully, mindful, comfortable with where your investments are. Not in a sort of hokey dokey way, but there’s lots of things to be concerned about and stress about, and hopefully your investments aren’t one of them. If you are stressing about your investments, if they’re too volatile or you don’t understand them, that probably indicates that you should take a deeper dive into them. But you know, really, we’re boring. We’re long-term focused. We love for our clients to have a plan and some objectives to help frame their investment solutions. I think people think about me as an investing person, but I’m like the cart that’s following the horse, which is a plan or some kind of objectives and really once you have those objectives and plan in place, the investment solutions really becomes a lot easier. So, hopefully people have that relationship, investments to their objectives.

You know, it’s going to be a challenging year and several years as we exit the pandemic – lots of information flow. Hopefully you won’t get overloaded, and yeah, best of luck! We’ll be back here doing this in another three months and hopefully have some more optimistic things to talk about.

[Sandi] Well, thank you for what you did share today and to all of our attendees, thank you so much for joining us this evening.

And, in particular, thank you to the people who had such great questions. This was really banging, so I hope everybody enjoys the rest of their afternoon or evening depending on where in Canada you may be, and we will see you again three months from now. Have a lovely evening.

Darryl Brown
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