Over the last few years, the capital markets, and more specifically, U.S. stocks have provided steady returns to investors. As a result, your portfolio has been experiencing incremental gains almost every quarter. Realistically though, and as we’ve seen over the last few months, these steadily increasing market valuations are not sustainable. Normal market activity involves occasional declines, often referred to as ‘corrections’. It is also normal for markets to experience extended periods of churning prices that lead to a ‘sideways’ movement with no net price gains.
When you invest your money in a bank account, your performance occurs in a cumulative, arithmetic progression, where each month the value of your account increases, depending on the rate of interest. By contrast, investing in the capital markets does not normally result in such dependable, and cumulative arithmetic gains, but often results in alternating periods of gains and losses. Profits generally accrue over long time frames like 5 to 10-year intervals, with intermittent periods of, sometimes, dramatic declines.
As you know, stocks are assets representing an ownership stake in an underlying business. Business conditions change over time based on overall economic conditions, government policies, interest rates, and the fortunes of the specific business and industry. Unlike real estate, the stock market provides a daily pricing mechanism for stocks which has the effect of showing the daily price volatility of the market value of these businesses. Furthermore, the investment industry supplies quarterly updates on these price movements. The stock market provides owners of stocks with 'liquidity' - the ability to convert their holdings to cash on a daily basis.
Unlike stocks which represent an equity ownership in a business, ‘high yield’ bonds are ‘debt securities’ issued by companies that represent an obligation by the company to pay the investor their principle plus a fixed return if held to maturity. The high yield portfolio manager often trades these bonds prior to their maturity in an effort to capture above average gains, or to limit declines. Year-to-year performance for high-yield bonds tend to be less volatile than that for stocks. High yield bonds, under normal circumstances, also trade in a liquid marketplace that allows for daily pricing of their values, and easy convertibility to cash. As such, any volatility in this market is transparent to the investor.
Real Estate by contrast has no such market mechanism, or liquidity feature, and owners are reliant upon local demand and supply conditions when they wish to sell. Real estate can often take weeks or months to liquidate. Real Estate market valuations therefore do not have a mechanism to report daily changes in prices - which means owners, aren't psychologically influenced by daily reports in the press, nor by quarterly statements from a financial institution.
Instead they evaluate results over the life of their ownership which tends to, psychologically, smooth out performance. This leads many people to the erroneous conclusion that housing never declines in value, which anybody who bought a house in Toronto or Vancouver in 1989 can attest, is not true.
Another factor influencing your portfolio value is changes in the exchange rate between the Canadian and U.S. dollar, which can play a significant role in shorter term gains and losses. Since last autumn, according to the Bank of Canada, the Canadian dollar has devalued by over 10% against the U.S. dollar resulting in a boost to the value of your U.S. holdings.
At present, stagnation has crept into the U.S. stock market, and the Canadian stock market has suffered from the unusually large drop in oil prices. Coupled with the historically weak summer months that are now upon us, the next couple of statements may be disappointing. However rest assured that your portfolios are well-managed, well-diversified and closely monitored to ensure your longer-term success.
Please contact me if you have any questions.
Sincerely,
John Soutsos, CIM®, EPC, B. Econ.
Investment Advisor,
IPC Securities Corporation
Private Client
Wealth Management Services
jsoutsos@ipcmississauga.com
Disclaimer: The comments expressed here are the opinions of the Advisor and may not represent the views of IPC Securities Corporation.
05 June, 2015 Financial Planning Investment Services