Investors Have Got It Wrong Again

Investors Have Got It Wrong Again

We see it time and time again the markets take a downturn and investors act against the basic principle of “buying low and selling high.” Investors have done the opposite of what they should be doing and have stopped investing.  Today on ThinkSmart Senior Financial Advisors Rob McClelland and Mike Connon discuss strategies to take advantage of the current market.



Rob (00:00):

Hello, this is Rob and Mike from The McClelland Financial Group of Assante Capital Management. And this is Think Smart with TMFG.

Rob (00:11):

Today on Think Smart with TMFG, Mike and I are going to be discussing, “Investors have got it wrong once again.” Mike, before we get into that, I thought I would just talk a little bit about our podcast. This is our 162nd podcast. In the last week alone, we’ve had over 150 downloads of our podcast, just shy of 600 over the last month. To date, we’re headed to 20,000. We have 19,100 downloads since we started this thing. So, thanks to our listeners, and Mike, I look forward to hitting that 20,000, and hopefully it’ll be fairly soon.

Mike (00:50):

You said before, you could fill a stadium.

Rob (00:53):

Okay. Almost fill, what’s it called now, the Scotia Center, or-

Mike (00:58):


Rob (00:59):

It’s changed so many times, I’m more comfortable with the Air Canada Center than the Scotia Bank Center.

Mike (01:04):

We have more finance than a Leaf game. Deservedly so, too.

Rob (01:08):

Exactly. So, investors have it wrong again. Here is the most recent data on what is going on in the mutual fund world in Canada. During the month of May, 6.4 billion dollars came out of mutual funds. In April, it was pretty bad, but it was only 4.9 billion dollars that came out of mutual funds. So, that’s the net number. So, money is always going into mutual funds. This is the money that actually came out. Believe it or not, the vast majority of those redemptions came in the balanced fund category, where redemptions doubled from just 2 billion in April to over five and half billion dollars in the month of May.

Mike (01:57):

You buy a balanced fund so you don’t do this, right?

Rob (02:01):

Absolutely. And yet, investors seem to be getting really frustrated with the 60/40 portfolio. Equity mutual funds weren’t quite as bad. They only had a billion in redemptions in May, and they were $700 million the previous month. What are bond investors doing? Are they doing anything like that?

Mike (02:24):

It seems to be the same thing, because as things go down, bond fund redemptions slide… Well, they were… What are they, $9 million dollars last month. They were $1.75 million in April, so they’re not as bad as April, because I think people were looking for somewhere to go. But again, still down, as people were still taking money out, both stocks and bonds.

Rob (02:48):

So I always ask the question, “Why are investors getting out of the market?” And, we see it in our business. We see when investors give us money and when they don’t. And we can say, in 2022, they have stopped investing. We see it right away, and it’s happening industrywide. Stocks are down 15 to 20% across the globe. Bonds are down 10 to 15% across the globe. Both of those are on sale. Inflation is between eight and nine percent, and the only way to beat inflation is stocks or real estate. So, let’s go back to basic concept here. When is the best time to buy an investment?

Mike (03:34):

When it’s down.

Rob (03:35):

But we’re seeing investors sell the investment because it’s down.

Mike (03:41):

I guess we’re into this fear greed scenario, right? When you look at investor behavior, they react under two things. One is fear, and one is greed. And in the last couple of years, we’ve seen a lot of greed, when people are willing to pay a lot of money for stocks at a very high price because of what they thought they could get out of… Cryptocurrencies, all that stuff, just sheer greed. There’s no other excuse for it. It’s just greed. And right now when we see these redemption happening, this is a straight fear move. There’s no reason for it. There’s no practicality or there’s no way where you could justify what you’re doing. The only reason to justify is, “I’m afraid.”

Rob (04:22):

We touched on stocks, bond inflation. I didn’t even touch on Bitcoin. I did some math this morning, and it was down about 70% from its peak of last year. So, it’s in a severe bear market. It’s almost in a depression. Is there a better strategy? What do you think are some of the strategies, rather than getting out of the market? We’ve said things are on sale. What are some strategies to actually put money into the market right now?

Mike (04:53):

Well, we’ll start with a portfolio. Having a rebalancing process into your portfolio works wonders. This allows you to go and buy into the areas that are lower in your portfolio. It forces you to buy into the right areas. Beyond that, there’s different ways to get into the market. I mean, one way, which I love, is dollar cost averaging into the market. You go and you say… And dollar cost average, it sounds simple, but the tricky part for it to work, it has to be a commitment. And what it means, you can’t just dollar cost average, it doesn’t work out in two months, stop it. You got to keep dollar cost average through good and bad, but it allows you to buy things when the market swings to a lower piece. Part of the marketplace, you buy more of that security at a lower price. And when you look at the average price you paid for anything you bought in your portfolio, it’s lower than the average price of that holding. And it just always works well.

Rob (05:51):

So, let’s say we had a million dollar portfolio, and we wanted to… We understand that stocks are down and bonds are down, and we want to add a hundred thousand dollars into our million dollar portfolio. Would you put it in the portfolio right away, or what else could you do if you didn’t want to put the whole thing in today?

Mike (06:14):

Oh. So, Fama and French would always say you put it right away, because the markets go up more than they go down, and if you don’t know where the markets are, if you accept that the markets are efficient and they’re where they’re supposed to be, the more time you have that full amount of money in the market, the better your long term return. But not everyone can buy into that full idea. So, if you want to play a bit of a safer game, you can go and say to that a hundred thousand dollars, “I’m going to start to average that in at, let’s say, $10,000 a month for the next 10 months.” And that way, if we are going to a recessionary period, and the markets do stay rough along the way, every time that market bounces down, you’re going to take advantage of buying a cheaper security.

Rob (06:59):

That sounds pretty good. Any other strategies? Could I put the money in, but maybe put it into the stuff that’s down the most? Would that make any sense?

Mike (07:09):

It can at times, but you got to be a little bit careful, too. It works well on using index type of strategy when you’re buying indexes. The problem with stocks is, you don’t know if an individual stock… Just because individual stock dropped in price, doesn’t necessarily mean it’s cheap. As we were just talking about Bitcoin, just because Bitcoin is down 70%, doesn’t mean it’s a great investment. We saw Nortel at one point, a career drop by 80, 90%. Still wasn’t a good investment. Tesla, companies like that. I don’t know if they’re good investment still at this price. They’re still expensive. So, from a index point of view, I think it makes sense. When you start to use the same theories on individual securities, it doesn’t hold the same amount of water.

Rob (07:51):

You and I are evidence-based advisors. So, let’s look at some evidence on doing this. The empirical research says, trying to time the bottom is time consuming, is stressful, and it’s a loser’s game, since most of the best days and the worst trading days happen within days of each other and often back to back. So, some research has been done, and they looked at all these different strategies of market timing over a 25 year period. And what they determined at the end of it, you only had about a 2% chance of improving your return by one and a half percent a year. So, you had a little chance of doing it, but it only improved your returns by one and half percent a year over that 25 year time period. So, it means 98% of the time, it didn’t work.

Rob (08:49):

Meanwhile, the under performance of not doing anything was only three and a half percent. So, you’re better just to stay in the market and not take these crazy risks that you’re going to win the lottery by getting the 2%, as opposed to end up with the 98% where you underperform. The room for error is big if you think you can time the market. You’re better just to stay the course and let the market recover, which it always does. I’d like to talk for a minute about the 60/40 portfolio. The 60/40 portfolio is the standard portfolio for the average investor. It’s been around forever. In fact, it’s been around since, believe it or not, 1928, in a mutual fund structure. But every couple of years, it seems to take a barrage of, “It doesn’t work anymore.” It’s kind of like everyone says, “Warren Buffet doesn’t deliver better returns anymore.” It’s a bit like that. And if we look at the evidence, these first four months or five months of the year have been the worst returns for the 60/40 portfolio since 1928. Mike, that’s a long period of time.

Mike (10:11):

Yep. A lot of things have happened.

Rob (10:14):

But, it’s a bit of a trick, because we’re just looking at that January to April time period, really, sort of the four month period, not the five month period. If you looked at other four month periods, in other words, a four month period might be from June to October, then this time period isn’t the worst. In fact, it’s just the 29th worst. So, there’s been four month time periods that were even worse than this for that 60/40 portfolio. Historically, what’s interesting is once you’ve had a period of underperformance of that 60/40 portfolio, it tends to have a period of outperformance. And normally that underperformance period is very short lived. So, those are good things of why you should stick with it. Here’s some interesting numbers. Vanguard actually has a balance fund. It’s a North American 60/40 balance fund that has been in existence since 1929. Now, that fund has been purchased by different companies over time, but it still exists. Its average return since 1929 is 8.3%. Mike, do you think most investors would be pretty happy with that return?

Mike (11:36):

Yeah. It would make the plan work, wouldn’t it?

Rob (11:38):

It certainly would. It’s certainly well ahead of inflation over, what… Since 1929, that’s a long time period. So, the 60/40 portfolio isn’t dead. It’s going through a rough patch, it will recover. That brings us to the end of another week. This is Rob and Mike with Think Smart from the McClelland Financial Group of Assante Capital Management, reminding you to live the life that makes you happy.

Assante Capital Management (12:15):

You’ve been listening to The McClelland Financial Group of Assante Capital Management Limited. Assante Capital Management Limited is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. Insurance products and services are provided through Assante Estate And Insurance Services Incorporated. This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources. However, no warranty can be made as to its accuracy or completeness. Before acting on any of the previous information. Please make sure to see a professional advisor for individual financial advice based on your personal circumstances. The opinions expressed are those of the authors and not necessarily those of Assante Estate Management Limited.

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