Aligned Capital Partners Inc. – Page 14

From The Desk of Brian Walker: The Hardest Part of Retirement

The moment you retire you are expected never work again.

Think about that for a minute. Every dollar you’ve ever EARNED has been EARNT. Your bank accounts will never be replenished again from your toil. All of your income from here on will be the result of your Canada Pension and OAS, any private pensions you are a part of and your savings. This is your life and your future boiled down to a number.

And as most companies stopped defined benefit pensions, many Canadians have had to turn (usually out of necessity) to investing in the market to grow and fund their retirement.

I have yet to retire, although I admit to being closer to it now than I was 20 years ago when I started this business, and I have to acknowledge that I find the prospect of retiring frightening. Work has occupied most of my life, and while I enjoy travelling and have a number of hobbies I have developed over the years I wonder if they can fill my days. But the thing that always sits at the back of my mind is about the money.

Because regardless of how well you have done in life there is always the potential to lose money in the markets, but so long as you are working you can replenish some of those losses. Once you have retired however, that’s all there is. A financial loss can be permanent in retirement and its impact will last the rest of you life, defining all your future decisions.

For my currently retired and retiring clients the thing that has surprised me the most is that while these concerns are very present, they sit alongside a concern that should really be receding: market growth. For all the worry about protecting their retirement nest egg from severe downturns and unforeseen financial disasters, many investors are still thinking like they are accumulating wealth and have twenty years until they retire.

When it comes to investing, retirees need to be looking at investments that fit the bill of dependability and repeatability. Dividend paying stocks, balanced income funds and certain guaranteed products offer exactly that type of solution, kicking out regular, consistent income that you can rely on regardless of the market conditions. And as more and more Canadians head towards retirement we are seeing a growing base of useful products that fit these needs beyond the limited yield of GICs and Annuities.

The downside of these products is that they are all but certain to be constrained when it comes to growth. They simply will never grow at the rates of some companies, certain investments or aggressive markets by design. That’s a good thing, but nearly a quarter of a century of investing have instilled in many Canadians a Pavlovian response to the idea that investing must equal growth. But investors will be much better served by looking past desire for an ever expanding portfolio and towards investments that secure their long term income.

I’m not suggesting that once you retire you stop participating in the market, or that having any growth in your portfolio is wrong, or that it represents some kind of fault in your retirement planning. What is at stake though is controlling and protecting your savings and lifestyle by making your investment portfolio subservient to those needs over growth focused market participation. Your retirement could last almost as long as your entire working life, and easily as long as the amount of time you saved for your retirement. There will be plenty of things to worry about in retirement, and lots of other financial needs that must be addressed; from comprehensive estate planning to out-of-pocket health care costs. Why complicate your retirement needs by worrying about whether your are participating fully in bull markets, or worse, bear markets?

If you would like to discuss how we can help your retirement needs, or how we can re-tune an account for retirement please send us a note!

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September 11, 2014 by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc

Super Cool New Device Won’t Fix the Economy

Apple just unveiled its new watch (called the Apple Watch no less) and briefly I watched the stock price climb quickly as the promise of Apple’s great new thing came to life. But before Apple had its big webcast yesterday, I was actually having a look at this nifty thing called NAVDY.

NAVDY seems like a great idea and its one of many many great things that is regularly and constantly being developed by an increasingly connected world that funds great ideas through websites like kickstarter.com. But like many new great things that I see, most of them won’t dramatically change the economy in any significant way. Specifically, none of these new businesses will create a great number of new jobs.

This may seem like a small point to quibble over, however when we look through the prominent industries that tend to occupy the business sections of newspapers, like Apple Computers, you begin to realize that very few of these businesses do much in the way of employment. Improvements in productivity, automation and robotics continue to eat away at an industrial base that forces young people into retail sectors, and an older generation into early retirement.

More people are employed in Canada year-over-year, however it has involved net losses in high employment sectors combined with net gains in high-education sectors. Many of the jobs that employ lots of Canadians present opportunities for automation. Click on the image to view a larger version.

From Stats-Can - the widening gap in unemployment spells. Being employed in manufacturing meant you could be out of work longer in Canada than in non-manufacturing based jobs. — From Stats-Can – the widening gap in unemployment spells. Being employed in manufacturing meant you could be out of work longer in Canada than in non-manufacturing based jobs.

Where there were once middle class factory jobs for thousands of Canadians they are now increasingly rare, and often exist through substantial subsidization from the provincial or federal government.

This story isn’t new. In fact it’s so old now that the first real impact of it dates back to the 1980s. But as time marches on and we are increasingly numb to this reality it may have escaped our attention just how great a challenge this is posing to our society.

For instance, today, Vox.com posted an article about “Why you need a bachelor’s degree to be a secretary“, focusing on how many jobs are “up-credentialing”.

Industrial decline also plays an indirect role in rising housing markets in cities. It’s easy to see that falling employment in traditionally well paying blue-collar sectors may contribute to higher crime rates and stagnant wages, but it also tells us where it makes the most sense to live. Young Canadians finishing university are unlikely to move back to Windsor when the best jobs are now in Toronto, fuelling a condo boom while raising housing prices across the city to the point of being unaffordable to new families.

From the Economist, January 18, 2014: Briefing: The Future of Jobs - Retail services continue to grow as other market sectors decline. — From the Economist, January 18, 2014: Briefing: The Future of Jobs – Retail services continue to grow as other market sectors decline.

All of this speaks to a larger and more looming issue for Canadians, which is that continued improvements in automation place long term pressure on things like infrastructure and wealth distribution and raise other questions about middle class viability. In other words, we seem eager to introduce new technologies into our lives, but each of these technologies doesn’t just reduce jobs, they reduce jobs that employ lots of people. The January 18th, 2014 Economist ran a frightening story about this kind of automation and that up to 47% of existing jobs could come under pressure by new forms of cost effective robotics and computers.

It’s often hard to see changes that are incrementally slow, but changes are occurring, and over the coming years and decades these changes will likely shake out in ways that we aren’t expecting. But for Canadians looking to save and retire in the future, many of these trends are coming together in worrying ways. In the form of higher educational costs, more limited job opportunities, higher costs of living and potential unemployability, and sadly the new industries and businesses we are quick to promote won’t likely be enough to stave off a society that is undergoing a significant shift in how it employs people.

All of this is a lot to explain in a single article. But if you’d like a simple video that does a good job of scaring you, please watch this video by Youtuber CPG Grey, whose excellent video from a few weeks ago got widely picked up and shared on the web. Otherwise, if you’d like to talk about getting set-up with a savings plan, either for yourselves and kids please give me a call!

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September 10, 2014 by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc

Why The ALS Ice Bucket Challenge Made Economic Sense

This week it seemed that much of the media hype around the ALS Ice Bucket Challenge died down as it gradually became eclipsed with other news. In case you somehow missed what this viral sensation was, it went something like this. What started as a youtube video of someone giving $100 to an ALS charity instead of having a bucket of cold water dumped on your head, spread quickly into having a bucket of cold water dumped on your head and also giving money to an ALS charity, followed by the donator/victim challenging several other people. These were filmed and placed on Facebook and youtube and people have been following it.

For the several charities that raise money for ALS research, the challenge has proved to be an enormous windfall, netting more than $100 million in donations in excess of their normal annual fund raising. But all of the cheering and success brought in the professional cynical class of journalists. There must be a downside, and by god they would report it.

I’m not going to go into the details of the criticisms here, but here are some articles you can read if you are so inclined. Instead I want to show why the economics of which charities we give to makes more sense than critics often believe.

The standard argument goes something like this: We contribute far more money to diseases that won’t likely kill us than the ones that do. Humans are clearly illogical and if they had any sense we would direct all our money into charities that dealt with the things most likely to wipe us off the planet. This misalignment of money versus danger is similar to why we are so scared of terrorists than swimming pools, even though you are far more likely to drown in a swimming pool than be killed by terrorists.

Donating.vs.Death-Graph.0

Except that it’s all wrong! People give money to the charities that matter most to them because they understand something about diseases that kill you better than people who just look at statistics.

For instance, Heart Disease is the number one killer in almost every western country, with (I believe) the exception of Portugal. So why aren’t we more scared of heart disease? Because it typically doesn’t kill you until you are already old. While your odds of getting and dying from heart disease start to rise significantly when you reach 60, since 1952 the cardiovascular death rate in Canada has dropped by 75% and nearly 40% in the last decade due to improvements in medicines, surgical procedures and prevention efforts according to Statistics Canada. In other words we’ve already made great strides in reducing unnecessary death from heart disease, and reducing the likelihood that heart disease will strike early is as easy as simply eating a healthier more balanced diet.

Cancer on the other hand isn’t fully understood. We don’t know why some people get it, and why some do not. We don’t know why some people have cancer go into remission and why some do not. If you have survived cancer you have likely been through a hell of an ordeal, as almost every known treatment is as bad as the disease you are fighting. If you’ve watched a loved one pass away from the disease you know how difficult it was and had to watch someone slip away, often in pain and great discomfort, losing control of their bodies and losing even their sense of self.

The mistake that the statistics cover up is this. You must die of something. People do not simply get old and die. They get old, weaker with time, and finally susceptible to something far more likely to kill them. Increasingly heart disease is something that you die of when you are old. Cancer by comparison can strike you down in the prime of your life. You can get cancer in your 20s, 30s, 40s, 50s, 60s, or 70s. Its a difficult disease to overcome, survivors are acutely aware that they have a high chance of reoccurrence and people who have lost a loved one feel the pain of a prolonged illness. In that context we give money to charities that fight diseases that leave a strong emotional scar, like cancer or in this case ALS, and that does make economic sense.

We took a little time off this week following labour day. We’ll be back next week with regular postings!

September 5, 2014 by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc

Russia Invades Ukraine, Needs Potatoes

This Russian paratrooper crossed the Ukrainian border “by accident”

Last week it looked as though Russia was escalating its engagement in Ukraine, sending supplies directly into Ukrainian territory and potentially starting a full blown war. But things have remained opaque since then, with increasing reports that Russian troops were crossing the border and Russia steadfastly denying it. But after days of reports from the Ukraine that Russia had started a low level invasion to assist with Pro-Russian forces, CNN reports this morning that Russia is now using tanks and armoured personal carriers and is fighting on two fronts within the Ukraine.

Whether this proves to be a false start, or if Russia is going to become more open in its military involvement it’s hard to say. What is clear is that this war in Ukraine is far from over.

Meanwhile this week also saw some evidence about the rising cost of food in Russia as a result of the retaliatory trade restrictions directed at nations like the United States, Canada and most of Europe. Reported in Slate and Vox.com, this graph of rising food costs is actually quite surprising. Potato prices have risen by 73%!

I’m reluctant to say too much about this situation and what it means from an investor standpoint, lest people think I am taking the suffering of people in a war zone too lightly. I will say that as emerging market countries become richer and begin to flex their national muscles, jostling over everything from important natural resources, long disputed borders, and sometimes even national approval, its likely that international events could increasingly be outside of our control. Since much of our manufacturing is now outside of our borders, and often even energy supplies come from nations openly hostile to us, we find ourselves in an economic trap of our own making. How can you act with a free hand against a nation that holds so many of your own economic interests?

Screen Shot 2014-08-28 at 11.39.19 AM — From “The Economist” July 27th, 2013 “When Giants Slow Down”

I sincerely doubt that our sanctions against Russia or high potato prices will bring Putin to his knees, (although his people may get fed up with higher food costs) but in the past it was much clearer how to deal with this kind of brinkmanship. Today we live a world where many of our economic interests are heavily tangled with nations who do not share our same strategic goals. It is said that nations do not have friends, only interests, and as Emerging Markets look increasingly attractive to foreign investors we may have to remind ourselves that Emerging Markets are not simply opportunities for growth, but nations with their own set of interests and goals separate from our own.

August 28, 2014August 28, 2014 by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc

The Real Reason Why Tim Hortons and Burger King are Merging

While I rarely get the chance to watch late night TV anymore, I’m sure there will be a few segments on The Daily Show and Colbert Report about “inversion” – the process by which American companies buy another foreign firm and relocate their head-office there to avoid paying taxes, over the next couple of days.

Screen Shot 2014-08-26 at 4.15.26 PM — Click on this picture to see John Stewart make fun of “tax inversion”

The arrival yesterday of the Burger King/Tim Horton’s deal has a number of lawmakers and journalists screaming about lack of loyalty, tax dodging and America’s uncompetitive corporate tax rate. But being quick to anger isn’t the smartest way to understand why one company might wish to purchase another and pull up stakes.

For instance, despite claims that Burger King intends to avoid substantial taxes in the United States in favour of Canada’s more moderate tax rate isn’t actually that true. As reported this morning by the Financial Times, the two companies both pay a very similar effective tax rate, literally only points apart from each other. So relocating a company like Burger King may indeed yield some benefits in taxation, but likely so small as to not make the deal worth while.

So why do it? It may have more to do with the Burger King itself and how it was acquired in 2010. According to the Financial Times, Burger King was purchased in a leveraged buyout, meaning that those doing the buying borrowed a great deal of money to do so. But interest expense is tax deductible. Since 2010, Burger King has been restructured and deleveraged, and since it went public in 2012 has had an 85% return in stock value. In other words, the people who own Burger King have done well. But buying Tim Hortons means that the consortium will once again have to borrow substantially to do the buying, creating further tax right-offs for the newly merged company.

Burger King's share price since it went public in 2012 — Burger King’s share price since it went public in 2012

There are other reasons for this merger that actually make sense. Burger King is struggling to gain market share and is under pressure from the growing business of “fast-casual” restaurants like Chipotle. But despite that it has a strong operating margin, 52%, which shows that the restructuring has been effective at making the business profitable. Meanwhile Tim Hortons has an operating margin of only 20%, an opportunity for improvement in the eyes of Burger King. Together they will form the third largest fast food business in the world and open a new front into the coveted and notoriously difficult breakfast market.

Operating Margin and Effective Tax Rate for Burger King and Tim Hortons. Courtesy of the Financial Times

There may be other synergies and reasons for this merger and subsequent inversion, and the tax benefits that come from borrowing could do with some scrutiny, but it would seem from the outset that avoiding taxes is hardly the exclusive driving force behind this deal.

August 26, 2014August 27, 2014 by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc

California could be at a tipping point…

I’ve been quite vocal about how one day we will have to accept that things we get for free may not be free forever. Water is of particular concern for everyone not simply because it’s a necessity, but because almost none of us live with water scarcity anymore its often hard to connect the dots when it comes to facing real water shortages.

Take for instance California, whose three year drought has reached new and frightening proportions. There are some excellent articles about what impact the drought is having here and here, but take a look at these images of water reserves from 2011 and then the same locations from 2014. Running out of water is a frightening prospect, but 30 million people don’t just pack up and move because water has gotten a little scarce. What happens instead is you begin paying more for water while getting less back in economic benefits.

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I highly recommend Elizabeth Renzetti’s excellent piece in the Globe and Mail today, and I suggest everyone have a read of it. Its an excellent reminder that the biggest issue we face in managing serious economic and environmental problems is not a lack of skill, knowledge, or imagination, but a simple willingness to face the problem. The outcome of which is usually higher costs for everybody immediately, and possibly disastrous results in the future.

August 25, 2014August 27, 2014 by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc

Why it’s so hard to see a financial correction when its staring you in the face

If you’ve been following this blog, you’ll have noticed how I am regularly concerned about the state of the Canadian economy. And while I maintain that I have good reason for this; including fears about high personal debt, an expensive housing market and weakening manufacturing numbers, the sentiment of the market isn’t with me. As of writing this article the TSX is up just over 14% YTD, spurred on by strong numbers in the small cap, energy and banking sectors.

All this illustrates is the incredible difficulty of understanding and seeing the truth in an economy. Is an economy healthy or unhealthy? How do we know, and which data is most important? Economies produce all kinds of information and it’s frequently hard to see the forest for the trees. But even with all the secrecy around the bank’s and regulators financial misdeeds prior to 2008, the writing was on the wall that the US housing market was over inflated and that savings rates were too low and debt rates too high. And while you could be forgiven for not really understanding the fine points of bundled derivates and just how far “toxic debt” had spread, it wasn’t as though the banks had hidden the size of their balance sheets or the number of outstanding loans. It was all there for anyone to see. And people did see it and then shrugged.

One of the big fallouts of the financial meltdown was extensive criticism directed at the professional class of economist and business reporters who give regular market commentary and missed the total implosion of the financial and housing sectors. After all, how good could these “professionals” be if they can’t see the financial freight train like the one that just came through? . But I would chalk that up to overly positive market sentiment. It’s not that they didn’t see the bad news, they just assumed that other better news was more important.

Look at these two articles from yesterday’s (August 20th, 2014) Globe and Mail:

Canada losing steam in its push for an export boom

&

Bump in shipping a boon to Canada

While these two articles aren’t exactly equal, (one is talking about Canada right now, the other is talking about prolonged growth of Canadian shipping over the coming decades) it’s interesting to note that they sit side by side on the same day in the same newspaper. For investors (professional and individual alike) it is an ongoing challenge to make sense of the abundant information about the markets without resorting to our “gut feelings”. Do we tend to feel good about the market or bad? Which headline should be more important? Here is a third article from the same day: (Click the image to see the full size article).

Its plain to see how I feel about the state of the Canadian market (and which news I place value on), but its also possible that I’m the crazy one. Lots of Canadians disagree with me quite strongly and it is shown everyday the TSX reaches some new high. Which brings us back to investor, or market sentiment. Described as the “tone” of the market, it might be better thought as human irrationality in assessing odds and errors in estimating value. Investor sentiment plays a significant role in valuing the market over the short-term, far in excess of hard financial data. And it isn’t until that sentiment turns sour that we begin to see corrections. Coincidentally, holding an opinion contrary to the popular sentiment is quite lonely, and many portfolio managers have been criticized for their steadfast market view only to be proven right after they had acquiesced to investor complaints about poor performance.

Following a correction, once the positive market sentiment has been washed away, it seems obvious to us which information we should have been paying attention to. But that doesn’t mean being a contrarian is automatically a recipe for investment success. I may be wrong about the Canadian market space altogether (it wouldn’t be that shocking), and in time I will regret not placing more value on different financial news. What is far more valuable to investors is to have a market discipline that tempers positive (and negative) sentiment. An investing discipline will reign in enthusiasm over certain hot stocks, and keep you invested when markets are bad and the temptation is to run away. Sometimes that means being the loser in hot markets, but that may also mean better protection in down markets.

August 21, 2014 by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc

Russia’s Trade War Shows Europe to be The Better Economy

Since I first wrote about the Ukraine much has happened. Russia has been unmasked as a bizarre cartoon villain seemingly hellbent on destabilizing the Ukrainian government, assisting “rebels” and being indirectly responsible for the murder of a plane full of people. All of which came to a head last week when it appeared that Russia might have just started a war with the Ukraine (still somewhat indeterminate).

Russia’s moves with the Ukraine may have more to do with challenging the West, and some of the other recent militaristic actions show that may be its real intent. Russia announced in July that it would be reopening both an arctic naval base and a listening post in Cuba built back in the 1960s. Combined with many heavy handed tactics at home including essentially banning homosexuality, Putin is making a brazen attempt to assert its regional dominance and stem the growth of Europe’s influence in the most aggressive way it can. To some extent this seems to be working with his own population, but it isn’t making him popular globally.

Europe’s response to Russia has been to hurt it with economic sanctions, which since the Ukrainian situation first began have been escalating in severity. Two weeks ago Russia responded in kind. How? By banning food imports from sanctioning nations.

If you don’t know much about the Russian or European economies this may seem like potent response from one of the BRIC countries and major global economies. But Europe is a big economy, and agricultural exports don’t make up a significant part of GDP, with the same being true for the United States. And while sanctions targeted at farms can be politically dangerous (farmers are typically a well organized and vocal lobby) the most interesting thing about these sanctions is what it tells us about the Russian and European economies respectively.

First, Russia imports a great deal of food, mostly from Denmark, Germany, the United States and Canada. So sanctions imposed by Russia are really going to hurt the Russians as food prices begin to rise and new food suppliers (expected to be from Latin America) have to ship food farther. But more interesting is the sanctions Russia chose not to impose. Europe is heavily dependant on oil & gas for its energy needs. So why not really make Europe feel the pinch and create an energy crisis? Because Russia needs oil revenue.

16% of Russia’s GDP is made up from the oil and gas sector. Beyond that oil and gas make up more than half of Russia’s tax revenues and 70% of it’s exports. In other words Russia can’t stop selling its oil without creating an economic crisis at home every bit as severe as in Europe. Banning imports of food and raising the cost of living may not be the ideal outcome from sanctions you impose, but it is mild in comparison to creating a full on catastrophe.

By comparison Europe starts to look very good, and it’s a reason that investors shouldn’t be quick to write off Europe and all its recent economic troubles. It’s a large and dynamic economy, filled with multi-national companies that do business the world over. It is backed by stable democracies and a relatively prosperous citizenry. By comparison Russia is a very narrow economy, dependent on one sector for its economic strength run by a (in all but name) dictator with an incredibly poor populace. A few years ago it was quite trendy in the business news to write off Europe as a top heavy financial mess, and while I wouldn’t want to dismiss Europe’s problems (some of which are quite serious) it’s important to have some perspective about how economies can rebound and which ones have the flexibility to recover.

August 18, 2014 by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc

Why Malcolm Gladwell and TED Talks are a Terrible Way to Understand the Economy

The last few years have seen a slew of books that explore ideas about how nature governs far more of our lives than we might care to admit. Books like Stumbling On Happiness by Dan Gilbert and The Righteous Mind by Jonathon Haidt both explore the way that the subconscious mind governs many aspects of our lives. Meanwhile a number of other books like Malcom Gladwell’s Blink and Steven Levvitt and Stehpen Dubner’s book Freakonomics are working to explain the secret rules of economics in our lives. Book’s like this tend to distill highly complicated ideas down to bite sized stories, simplifying complex data into snippets of wit and good storytelling and removing the scientific uncertainty that may accompany many of the findings the books claim to show.

What’s far more interesting is how useless much of this data is. Take for instance this video from Vox.com about the statistical benefits of being good looking.

While much of the data seems interesting it isn’t exactly helpful, especially when we consider that this is in aggregate and doesn’t likely reflect your reality.

In fact many of these theories don’t reflect reality the way they hope. Freakonomics co-author and economist Steven D. Levitt found this out when they attempted to bribe students to improve their grades. While they did get some positive results, the reality was it was far from a resounding success. Even with an opportunity to earn $200 a week if the children continued to improve their grades many simply didn’t take the opportunity.

You may have never heard of Hernando DeSoto, but the Peruvian economist is sought after around the world for his insights about poverty and property rights. His book (which I love) outlines some of the most convincing connections between lack of property and the ability to improve one’s standard of living. His argument was that if squatters were given ownership over their home they would have collateral to borrow against and could start or improve their businesses. However, when in 2004 the World Bank carried out a program in Peru to test DeSoto’s theory that land titles would lead to more lending by banks. In actuality it failed in its entirety, with bankers unwilling to lend against the only asset of an impoverished family.

An actual simple truth is that life is unbelievably complicated and its hard to understand and know what governs many of the elements of our lives. Whether the question is nature of nurture, economics or social sciences in the end we seem to know very little about what drives some of the biggest events in our lives. In spite of the number of times these theories prove to be wrong, our media has come to speak more and more in absolutes. It is getting to be so that you can’t get on television or in government unless you claim to know all the answers without doubt.

Meanwhile there seems to be an actual deficit in useful information that the media ignores. For instance, a more intriguing statistic is that in a recent poll by Gallup, less than 25% of Americans were able to correctly identify what has been the most successful type of investment (You can do the quiz here). Over a third of Americans haven’t taken any steps towards planning their retirement and I’m sure that number is similar for Canadians. There is a knowledge gap opening up, where knowledgable investors will be able to save on average 25% more than less prepared and less knowledgable people, a reality that could be addressed by the news, but is being perpetuated through bad journalism.

August 5, 2014August 5, 2014 by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc

Correlation: Or How I Learned to Stop Worrying About the Market and Love Diversification

140617strangelove — The look of a nervous investor who needs more diversification

This year has seen further gains in the stock market both in Canada and the United States. But after five straight years of gains (the US is having its third longest period without a 10% drop) many are calling for an end to the party.

Calling for a correction in the markets isn’t unheard of, especially after such a long run of good performance. The question is what should investors do about it? Most financial advisors and responsible journalists will tell you to hold tight until it 1. happens, and 2. passes. But for investors, especially post 2008, such advice seems difficult to follow. Most Canadians with any significant savings aren’t just five years closer to retiring than they were in 2008, they are also likely considering retirement within the next 10 years. Another significant correction in the market could drastically change their retirement plans.

Complicating matters is that the investing world has yet to return to “normal”. Interest rates are at all time lows, reducing the returns from holding fixed income and creating a long term threat to bond values. The economy is still quite sluggish, and while labour numbers are still slack, labour participation will likely never return to previous highs as more and more people start retiring. Meanwhile corporations are still sitting on mountains of cash and haven’t really done much in the way of revenue growth, but share prices continue to rise making market watchers nervous about unsustainable valuations.

In short, it’s a confusing mess.

My answer to this is to stay true to principles of diversification. Diversification has to be the most boring and un-fun elements of being invested and it runs counter to our natural instincts to maximize our returns by holding investments that may not perform consistently. Diversification is like driving in a race with your brakes on. And yet it’s still the single most effective way to minimize the impacts of a market correction. It’s the insurance of the investing world.

This is not you, please do not use him as your investing inspiration.

The challenge for Canadians when it comes to diversifying is to understand the difference between problems that are systemic and those that are unique. The idea is explained well by Joseph Heath in his book Filthy Lucre. Using hunters trying to avoid starvation he notes that “10 hunters agree to share with one another, so that those who were lucky had a good day give some of their catch to those who were unlucky and had a bad day…the result will be a decrease in variance.” This type of risk pooling is premised off the idea “that one hunter’s chances of coming home empty handed must be unrelated to any other hunter’s chances of coming home empty handed.” Systemic risk is when “something happens that simultaneously reduces everyone’s chances of catching some game.” This is why it is unhelpful to have more than one Canadian equity mutual fund in a portfolio, and to be cognizant of high correlation between funds.

The question investors should be asking is about the correlation between their investments. That information isn’t usually available except to people (like myself) who pay for services to provide that kind of data. But a financial advisor should be able to give you insight into not just the historic volatility of your investments, but also how closely they correlate with the rest of the portfolio.

Sadly I have no insights as to whether the market might have a correction this year, nor what the magnitude of such a correction could be. For my portfolio, and all the portfolios I manage the goal will be to continue to seek returns from the markets while at the same time finding protection through a diversified set of holdings.

July 24, 2014 by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc