Who's Gonna Drive Your Car?

This article/newsletter was initially published October 2022. At the time, the advisor was not affiliated with iA Private Wealth Inc.

As we send out our quarterly report, I am reminded of how important it is to understand that some folks follow markets and performance daily, while others seldom look at things, especially when they hear negative news about the markets.

Again, this quarter, we are extremely pleased with our year-to-date (ytd) performance in PIMG relative to the indexes/markets we follow as they are down between -14.16 % ytd here in Canada, -24.7% on the S&P500 and over -33% on the Nasdaq in the USA.

Depending on your age and retirement status, if you are in our discretionary model, you should be pleasantly surprised looking at your ytd performance! Having the ability to adjust the portfolios as we see fit is a godsend as I remain baffled at the underperformance we hear of daily (and experience here in non-PIMG accounts) with the “smart money” used in mutual funds and managed assets that are experiencing much deeper losses.

There are some folks who believe market timing can save from large downturns, and after calling for negative markets for years, they are finally surmising how they were right. I am highly amused at that as I can tell you your car will break down “soon” also. Will that “soon” be in 1 month or 3 years? I guess since we don’t know that date for sure we should just park the car immediately forever? Or should I replace every part I think might break? Investments are vehicles also, and parking a car on a risk you cannot predict seems a bit odd and costly, don’t you think? For example, last week on Monday and Tuesday the S&P increased 5.6% in just two days, what if that continued and we were parked in the garage? It is times like these we do not want to be stuck on the side of the road or parked in the garage as missing times like these can be quite costly, as discussed later in the report.

I tend to think your investment horizon and diversification can be compared to owning and driving that car and realizing that other needs of travel are necessary to enjoy our lives. We cannot plan just for one day’s road trip or event. We all travel, being it by bus, car, plane, boat, bike, or running shoe. All of those vehicles eventually break down or wear out over time, but do we park them in the garage (go to cash) forever believing it will eventually break down? Are we then not the ones creating our own destiny by having the asset we need parked rather than utilizing it to make our lives better for now and for the long-term?

We all hope that those companies flying or cruising us around the world properly maintain and repair their vehicles to keep us safe when we travel, right? They plan maintenance outages to make sure they are proactive to get the most out of their vehicles and replace many parts before they break down. We try to do the same when building and maintaining your assets. Many different vehicles are used for retirement portfolios just as a world traveler uses planes, boats, cabs, transit, etc. I have more cash in retirement accounts for a reason, so they don’t break down and crash on the side of the road!

For example, just in the PIMG energy space we have transit (ENB, PPL, OKE) along with some quick movers (VET) and some higher yielding vehicles (PXD, WCP). Trying to get you through all the varying terrains along that energy trip. The focus is to try to have multiple vehicles (diversification) that work or replace others that might be parked a bit for maintenance or breakdown (company issue or market correction). If we believe that whole trip is too risky then moving to a different set of vehicles becomes very prudent. And if there is turbulence, we don’t just jump out of the plane or boat and risk not getting to our destination or imminent destruction (inflation risk and no growth or income), we ride it out! We know the ride isn’t always smooth on a plane, boat, or car and neither are markets. I don’t panic here either, I try to smooth it out and change course to avoid future turbulence.

Check out what happens when you try to park in the garage and time markets:

Hypothetical growth of $1,000 invested in the S&P 500 in 1970 (through August 2019):

• Total return $138,908

• Minus the best performing day $124,491

• Minus the best 5 days $90,171 • Minus the best 15 days $52,246

• Minus the best 25 days $32,763

Source: Dimensional Funds

As quoted from the same article with CNBC, "These are startling numbers. Not being in the market on the 5 best days since 1970 reduces your return from $138,908 to $90,171." The takeaway: If you’re not in the market on the most important up days, your returns are markedly lower. But nobody knows when those days will occur.

Vanguard founder Jack Bogle had a saying: “Don’t just do something, stand there!” The message: The best strategy would be to determine a long-term plan and stick with it and ignore the urge to “do something.”

Travel and portfolio construction both have similar needs: to take us along different terrain (diversification, growth and then income for retirement or education) and when something breaks or gets squeaky, we try to fix it (like selling a sector out of favour) or if we think it is getting too old and may breakdown, we try to be proactive and replace it. We sure don’t park the whole vehicle in the garage and just sit and wait for it to break there though! I have never replaced my fuel pump before it breaks, but I know when to change my tires. Some things are easy to predict and plan for (income using yield) and some are impossible. Different vehicles need to be handled in different ways, folks. We did so with your bonds years ago. We sold them all knowing times like these were coming and they too would break down (-13% ytd). We also chose not to take the ride along with gold or silver that many said I should buy when inflation and war were imminent. They are also down -8.43% and -18.29% ytd. I did not sell everything else thinking EVERYTHING was broken, all of the parts don’t break at the same time. I sure don’t want that nice vehicle to just sit and collect dust (depreciate in value just like inflation will do to cash) while I still need it to work for me.

We did choose to buy more dividend paying stocks to get paid in unsure times and positioned to much more energy related stocks (oil +18.2% ytd) as we saw the terrain change and decided it was time to get paid to wait and to also ride the shortage of oil as the world “transitions” away. That transition is a long way away and that vehicle will break down also at some point in the future, but we aren’t selling the car and taking the high road yet!

As I write this many events are unfolding daily, like inflation data that remains too strong, the prolonged war in Ukraine, and more events are yet to come in the next month. We have upcoming interest rate increase meetings here in Canada and then in the USA in the coming three weeks and then the USA election on November 8th. Also, we are just starting another earnings season, and this will be an interesting month or two. Companies will explain the headwinds they face even as the consumer remains strong in many areas of spending as others will slow down immensely in housing and new mortgages. Rents will increase which is terrible for lower income earners or those recently in the workforce and saving for a house and this headwind will be felt by many. Not good for banks, just like mentioned last quarter. Energy remains the strength as cut supplies and steady demand are still creating massive free cash flows for many producers, but their costs are also going up. Interesting times.

I can tell you that after market corrections there tends to be a time to invest in the muscle cars and Lear jets. We are experiencing a second bottoming process this year that is posing a possible recovery scenario and some possible nails on the road. That sounds like typical side speak, and I apologize for that, but with all the events upcoming we are consolidating around the bottom on the hopes that inflation will show some easing and the Fed will take their foot off the floor and start applying the brake. I can tell you sentiment is about as bad as it gets and that is usually a good contrarian indicator. From my friends at Mackenzie today:

We are nine months away from the peak of the market and this is what has happened in previous periods after:

I feel our vehicles are well-positioned to come out of the garage strong when things start to change and will trade them out as I see fit, just as I have been doing multiple moves in the past few weeks. Please call if you want me to discuss them in detail. Claus, Amanda, Carly, and I thank-you for your trust in us through these precarious times and hope you are happy with how we are driving your car through these bumpy condition: The Cars - Drive (Official Music Video)

Cheers,

Steve

 This e-newsletter has been prepared by Steven Switzer and expresses the opinions of the author and not necessarily those of Raymond James Ltd. (RJL). Statistics, factual data and other information are from sources RJL believes to be reliable, but their accuracy cannot be guaranteed. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. This newsletter is intended for distribution only in those jurisdictions where RJL and the author are registered. This provides links to other Internet sites for the convenience of users. Raymond James Ltd. is not responsible for the availability or content of these external sites, nor does Raymond James Ltd endorse, warrant or guarantee the products, services or information described or offered at these other Internet sites. Users cannot assume that the external sites will abide by the same privacy policy which Raymond James Ltd adheres to. Securities-related products and services are offered through Raymond James Ltd., member-Canadian Investor Protection Fund. Insurance products and services are offered through Raymond James Financial Planning Ltd., which is not a member-Canadian Investor Protection Fund.