Performance figures for each account are calculated using time weighted rate of returns on a daily basis. The Composite returns are calculated based on the asset-weighted monthly composite constituents based on beginning of month asset mix and include the reinvestment of all earnings as of the payment date. Composite returns are as follows:

NICOLA: Investment outlook: It was the best of times, it was the worst of times — is the glass half-full or half-empty?


Let’s separate apply these perspectives of positive and negative and consider how they may apply to today’s investing environment. 

By John Nicola

We’ve just emerged from a tumultuous and challenging 2021 which provided good results financially for many investors while being a significant emotional and psychological drain as the fourth COVID-19 wave became a reality.

As I was thinking about how we as investors want to approach 2022 and beyond. I’m reminded of the first lines from Charles Dickens classic about the French Revolution, A Tale of Two Cities.  To me it begs the question, “is the glass half full or half empty?” And the answer seems to be both. Let’s separately apply these perspectives of positive and negative and consider how they may apply to today’s investing environment.

It’s imperative to understand the current investment and economic environment and then assess how existing factors will impact major asset classes.

Glass Half Full
There are a number of factors that create optimal investment opportunities and give us reason to view the new year and investments in a positive light. The public markets and residential real estate are at all-time highs in a number of markets in Canada and across North America. COVID-19 vaccines have been developed and deployed in record time. The “fourth wave”/Omicron appear to have significantly lower levels of serious illness or death.

In light of major issues such as climate change, investment opportunities pertaining to environment, social, and governance (ESG) are accelerating rapidly. The cost and evolution of renewable energy is improving exponentially.

On a global scale, we have seen notable drops in levels of poverty, hunger, and illiteracy (Marian Tupy – 10 Global Trends.) Further, global population increases are slowing and likely to peak within 30 years at about 8.9 billion.

Finally, any rises in interest rates are likely to be measured and spread out over time. If that occurs, does that mean that any negative impact on asset prices would be modest?

Glass Half Empty

In the interest of seeing the whole (objective) picture, it’s important to observe and assess the other side of the coin. The new year does not come without challenges.

We’ve seen massive increases in corporate and government debt to weather the pandemic and finance acquisition of assets (Evergrande as an example.) The end result is a combination of higher inflation and corporate defaults.

Dysfunctional politics are a concern across the globe. We continue to witness geo-political tensions such as China/US and Russia/NATO, and the rise of populism in the US, in particular.

Equity prices (primarily in the US) are at near record valuation levels which has many questioning their sustainability. Higher interest rates and inflation could create a significant impact on residential housing.

Finally, the pandemic rages on. Faster infectious rates for Omicron lead to increased and extended lockdowns, globally.

Asset allocation is the key

Whether you are leaning to one perspective or another, or somewhere in the middle, how you invest and diversify your capital is going to play a vital role in helping you mitigate any volatility 2022 may bring.

The asset allocation model that we recommend to most of our clients is roughly divided into three major classes: Public/Private Equities, Real Estate (income and development), and Fixed Income (private and public).

Typically, we distribute 35% to fixed income assets (public and private), 35% to equity (public and private), and 30% to real estate (hard asset properties). Depending on views of both the opportunities and the valuation levels each of these asset weights could change plus or minus by 5%.

There have been a number of studies to support this type of asset allocation. Perhaps the strongest endorsement of this model is that the asset mix of some of the largest pension plans in Canada (considered by many to be amongst the best institutional investors in the world) which choose to allocate their capital in this way. If you look carefully you’ll see the pensions such as OMERS, CPP, BCIMC, AIMCO, and Ontario Teachers use some variation of the model above.

We subscribe to a similar approach. A chart on the Nicola Wealth site (Nicola Wealth vs. The Marketplace) demonstrates if you compare our average client returns since January 1, 2000 with other indices such as the S&P 500, TSE, and a compilation of balanced portfolios aggregated by Morningstar. In all cases our clients have had better results with less volatility (considerably less than any of the equity indices).

The acid test for a good asset allocation model is how well it performs during bear markets for public equities (which themselves are usually connected to a crisis or a recession or both.) The last two bear markets were the Great Financial Crisis of 2008/2009 and, of course, the COVID-19 market meltdown in the spring of 2020. In both cases, stock prices dropped in most public markets by 35% or more from their prior peaks.

Employing the balanced model above meant the drop in value of our client portfolios was 7.5% in 2008 and about 5% in 2020. That reduction in volatility fosters for far better investor behavior (another great topic we will explore in a future column.)

Notwithstanding that the right asset allocation model can make a big difference in risk-adjusted returns, each of these asset classes will be impacted in some way in a rising inflation and interest rate environment. In our next column we will explore how we believe that might unfold.

John Nicola, CFP, CLU, CHFC is a financial columnist for the Western Standard and is the Chairman of Nicola Wealth