As I write this email (8:00 am on August 25th), equity markets around the world are rebounding from what has so far been their worst month in years.
The question is – as suggested by the cartoon below – is this a dead count cat bounce, or one of those opportunities to acquire assets cheaply? Baron Rothschild relied on this strategy often and said that the time to buy was when blood was running in the streets, even if it was your own.
As most of you are aware, we have a highly focused philosophy that builds wealth and investment returns through the following strategies:
- Diversifying: our unique portfolio of asset classes that include fixed income, real estate and private equity
- Focusing on Cash Flow: a significant part of long-term returns from each asset class are generated by cash flow
- Reducing Volatility: our portfolios are less volatile when compared to long only equity investments
The table below provides close estimates of how the NWM Core Portfolio Pool (which represents a balanced portfolio that many of you have with us) has done over this current month and since the beginning of 2015. NWM CORE PORTFOLIO is managed using similar weights as our model portfolio and is comprised entirely of NWM POOLED FUNDS AND LIMITED PARTNERSHIPS.
The performance for many equity markets is far worse when compared to their peaks a few months ago.
- The DAX (Germany) is down more than 20% (officially a bear market since April)
- The Shanghai Market is down almost 40% since March and over 12% YTD (although still up 32% over the last twelve months
In addition, oil prices are at a low not seen since the 2008 panic and recession. Overall, commodity prices are down almost 50% from their 2011 peak and are now at levels equal to 2006. The Canadian dollar is at an 11-year low compared to the U.S. dollar.
Even with this change in equity markets, stocks are not inexpensive and, overall, the S&P 500 is almost 200% higher than it was in March of 2009. At this point, it would not be unusual to experience at minimum a correction and potentially a bear market.
From our clients’ point of view, this begs the following questions:
- Does it matter what happens to individual asset classes?
- Would investors be better to move out of equities entirely and “wait this out?”
From our perspective the answers to both questions are “no.” Here is why:
- Diversification works far better to build wealth than market timing. If one has the discipline to rebalance portfolios regularly (and we do), then over time we are reducing exposure to assets that have appreciated in price and acquiring ones whose prices have dropped. That is a good recipe for building and maintaining wealth.
- In any market, there are opportunities to buy assets that represent good value. Right now, we are acquiring well-priced assets in both real estate and private equity. Overall, our fixed income returns remain very good for 2015 given the extremely low interest environment we are in.
- With respect to equity markets, two of our funds (NWM Tactical High Income CDN & NWM Tactical High Income USD) use covered writing as a tool to reduce volatility over time. On a year-to-date basis, both pools have outperformed their benchmarks by 4%.
We do not know if this morning’s activity is a “dead cat bounce” or a sign that people are following in the steps of Baron Rothschild; however, we are certain that staying focused and disciplined will remain the best way to build and maintain wealth.
John Nicola, CFP, CLU, CHFC
Chairman & CEO
Nicola Wealth Management