The Great Rotation has been delayed due to lack of interest

It was a good theory. Panicking investors moved billions or trillions of dollars into bonds during the height of the U.S. Financial Crisis of 2008 - 2009. Although the U.S. stock market bottomed on March 9, 2009 with a -57% loss compared to its 2007 highs, stock markets roared back with a vengeance and kept going. But what about the Great Rotation back into stocks?

By all appearances, the “mom and pop” investor never really came back to the stock market and either hoarded cash or continued to plow money into the perceived safety of bonds even as the stock market rocketed upwards. Most likely stayed on the sidelines for the last five years and did not invest at all.

Towards the end of the year in 2013, stock markets were at all time highs despite the absence of the “mom and pop” investor [1].

So who or what have been driving these markets to about 30 all-time record highs so far this year? Certainly, it does not seem to be the retail client that is driving these markets to new highs.

Institutional buying? Pension fund buying? Mutual fund buying?

Quite likely all of the above.

What will be the spark that will finally ignite the retail investor’s interest to invest in the equity market once again?

Perhaps it will be investors’ 2013 year-end statements that might provide that spark. Chances are that many stock-based mutual funds will show some eye-popping returns that far exceed the expectations of their owners. With interest rates still close to historic lows, interest in mutual funds (containing stocks) could certainly pick up in a hurry.

Some caution should be exercised however. We have not had any significant stock market correction for a long time. Market volatility in 2013 has been subdued and is at low levels. The market will of course, experience some sort of market pull back. If you missed the big run-up in prices over the last five years and have money to invest right now, what are you going to do?

Need market strategies to get back in? Please call me at 519.744.3020 or email me at .

[1] The use of the term “mom and pop investor” is more commonly used in the U.S. In Canada, the individual investor is usually referred to as a “retail investor”.

2013 Review

Performance in 2013 (barring any last minute surprises) should be good. Perhaps, even very good.

International mutual funds could very well be the star of the show. Generally, you should see some really good returns in this sector over the last 12 months.

Our domestic Canadian equity funds? They may be OK perhaps but they are not exactly “shooting out the lights” at the moment. Canada’s stock market has not kept up with the U.S. stock market. Be aware that many Canadian equity funds (or funds classified as Canadian) may have large international stock holdings so some Canadian funds will get a considerable “lift” due to their high foreign content.

The lofty Canadian dollar has plummeted to the $ 0.94 mark at time of writing. Although this is bad news for Canadians planning a winter trip to warmer climes, we may console ourselves by saying that a cheap Canadian dollar should give our exports a bit of a boost.

Emerging markets appear to be recovering strongly from their summertime lows. European markets have done especially well over the past couple of years as the EU continues its recovery.

The retail investor is starting to show a tentative interest in the stock markets – some 5 years after the U.S. Financial Crisis of 2008.

The U.S. Federal Reserve Bank is still in “easy money” mode which means they are not anxious to raise interest rates any time soon.

Five year mutual fund rates of return are making big increases, as returns start to be measured from the low point in the markets between October 2008 and March 2009.

The real estate crash in Canada has definitely not arrived as housing prices are still increasing at a rate of several percent in the last year.

Canadian Financial Advisers are wondering if the regulators will ban commissions. The Australians figure the cost to convert to a fee structure was not too far under $2 billion Australian Dollars. I am still wondering if converting from a 1% commission to a 1% fee for a similar staggering cost makes economic sense for Canadian investors.

In a surprise move, some Canadian mutual fund companies have significantly reduced the cost of their funds in the do-it-yourself (DIY) channel for investors investing at discount brokerage firms.

If you have bonds in your portfolio or mutual funds containing bonds, rates of return may have dropped or stalled in 2013. Whether this poorer relative performance will trigger a massive exodus (The Great Rotation) out of bonds into stocks is an interesting question.

Overall, 2013 was a very good year. Client psychology made a major turn in 2013 as many investors shook off the fog of uncertainty and became a bit more optimistic.

Keep in mind that we have at least four out five outstanding years and stock markets (S&P 500) are some 160% above their lows in 2009.[1] Wow. That is some recovery!

Be aware though, we have not had any meaningful correction in the markets for a long period of time. So make sure you meet with your adviser and do a thorough review to ensure that you do not have too much stock exposure in your mutual fund portfolio.

Don’t wait too long. Make that appointment with me today!

For portfolio reviews, you can email me at or call me directly at 519.744.3020 to make an appointment.

[1] Source:

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 above, please make sure to see me for individual financial advice based on your personal circumstances. The opinions expressed are those of the author and not necessarily those of Assante Financial Management Ltd.

Asset Allocation and Modern Portfolio Theory – why they don’t work very well.

According to Paul Merriman’s 40+ years worth of data (certainly, a lifetime of investing), being 100% in global stocks beat the pants off any combination of global stocks and bonds. More bonds in the portfolio resulted in lower returns and higher stocks resulted in higher returns.

No big surprises there as the history generally indicates the higher amount of stocks in a portfolio, the higher the return (over a long period of time).

The big surprise is that the 100% global stock portfolio completely crushed the U.S. stock S&P 500 Index which is comprised of 100% U.S. stocks.

If you are an investor whose objective is to make the maximum amount of money by investing in a basket of stocks, the question is moot. You are 100% invested, 100% of the time.

According to the Merriman data, the verdict is out – for maximum returns, you want 100% global stocks, 100% of the time. If you want lower returns with less fluctuation, then your portfolio might consist of a combination of stocks and bonds.

The best way to accomplish these goals is through the use of managed money (mutual funds) utilizing an adviser.

That sounds simple enough, until you read the headlines. The news media have no trouble whatsoever telling you when or what to buy, when to sell and that the coming Apocalypse is surely just around the corner.

Can you and your stomach tolerate the dizzying highs and the abyss-like depths of the stock market indices over a period of four or more decades?

If the answer is yes, hopefully, you are not going on this journey alone and will have a value and trusted adviser to keep you on the straight and narrow along the way.

The big debate with financial journalists is that the cost of the investments always trumps behavioral economics. Behavioral economics in a nutshell, is the study of what real investors do in the real world and what motivates investors to make rational or irrational decisions with respect to their investments.

Do-it-yourself proponents mostly dismiss investor behavior as either irrelevant or having little impact on returns. Cost to them is everything and advice costs money, so by avoiding advice, you will automatically save/earn fortunes.

Wrong. And here is why.

Investor behavior is emotion driven (we are humans after all) and our genetics never prepared us to make absolutely logical investment decisions during periods of extreme market crisis. Not helping things is the fact that people generally, are not that interested in financial things – except maybe, during a crisis. How about financial education and financial literacy courses? Will a financially literate investor become a better investor with superior returns? Although I would like to say yes, the researchers disagree. Financial education is a dismal failure, the experts say.

So, if clients in the real world don’t have much of an interest in financial things, and often succumb to buying at market peaks and selling at market lows, why do-it-yourself (DIY) proponents conclude that advisers cost too much money? Or, that behavioral economics somehow, does not apply to DIY investors. Or that DIY investors never actively mismanage their own passive investments?

It is true that no one admits they are just an average investor. A majority of investors believe that they are above-average investors just like they believe they are above-average drivers.

Certainly, all the empirical evidence (a couple decade’s worth) indicates that the average investor wildly underperforms their own investments by at least a few or sometimes several percentage points per year!

How is this even remotely possible? Surely, the evidence is not saying that investors do worse than their own investments?

Apparently, yes it does. As a result of a subset of repeating behavioral patterns, investors were making predictably irrational investment decisions at the most inopportune times. For instance, the inappropriate response to media reports was cited as one of the major factors causing underperformance.

It is difficult not to get too cynical here given the empirical evidence regarding the media. But the research infers that the media does not help investor returns at all, but play a very significant role in destroying them.

And for the ardent DIY financial journalists out there, the quantifiable massive underperformance were not due to MER costs, savings on advice, trailing fees or the other myriad of factors that these writers endlessly moan about. All of that pales in comparison to the far more important behavioral factors that have the ability to utterly destroy investor returns over a lifetime of investing.

Bottom line, the prime determinant of investor success is what they do with their investments after they bought them. In the real world, investors get investor returns, not investment returns – a very big distinction indeed.

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 above, please make sure to see me for individual financial advice based on your personal circumstances. The opinions expressed are those of the author and not necessarily those of Assante Financial Management Ltd.

A fee is a fee is a fee...

Soon there will be survey results indicating whether or not investors prefer fees or commissions.

I hate these “Do you prefer being shot or hung?” surveys....

Behavioral economists tell us that the psychology of money is important. Their view is that billable fees will undoubtedly maximize the “pain of paying” and that an embedded commission is the way to go for asset management purposes.

To help illustrate the “pain of paying”, I recently read an article in which a well-known private money manager was complaining that he was having problems with his high net worth clients.

Evidently, these well-heeled clients were avoiding coming in for their portfolio reviews. Why would this be? Normally if you have the wealth to afford your own personal money manager, why would you avoid their services?

It seems to me the reason is actually very simple.

People generally despise fees. There are HST fees, fees and service fees for every little bank transaction. Fees even to receive a paper statement. Fees, fees and more fees on top of fees.

The world is awash in fees.

In this particular instance, the client was being charged an hourly fee for the money manager’s advisory services.

Many investor advocates and the press prefer the hourly billing method because they claim it is; "open, transparent and disclosed." This is true. I know this because when I receive my phone bill, the fees are generally open, transparent and disclosed. An hourly fee for advice (much like what a lawyer might charge you) I suppose, could certainly be an alternative to other types of adviser remuneration. However, from a psychology of money viewpoint, I see problems with bill-by-the-hour types of fee models.

Imagine having a portfolio review with your adviser in a taxi. You are paying for the taxi. When the adviser is going into a long discourse about modern portfolio theory and asset allocation, what are you going to be thinking about as you glance (every few seconds or so) at the taxi meter?

I think you know where I am going with this. The answer – you guessed it - is the “pain of paying”. And you are undoubtedly feeling more and more the “pain of paying” every time the meter ticks up by another dollar. At this point, you are probably not paying much attention to your adviser or the portfolio review and as the minutes go buy, you are squirming uncomfortably in your seat and when you can’t stand it anymore, you make some excuse that you have another engagement elsewhere to attend to. If this is a $10 million client and all you got is 0.50 billable hours, the adviser naturally, would have to dump the client for economic reasons. You just can’t afford to keep the client!

So much for openness, transparency and disclosure; rich or poor, people just don’t like fees.

The press and their anti-adviser brethren would clap their hands in glee. “Well, this is capitalism at its finest. The market will dictate pricing for you and sorry to say – you advisers will just have to adjust.”

Fair enough. We do live in a competitive marketplace and yes our “pricing” will adjust according to market forces.

Unfortunately, I think the press will be very wrong. I think pricing is going to be adjusted upwards if advisers are forced to go to fee-based structures by the regulators, press or investor advocates that despise commissions so much. Although my taxi story could be perceived by some as amusing (faintly perhaps), bottom line, hourly based billing fees are not going to work for the reasons given. But asset-based fees undoubtedly will.

Ironically, the press is cheering for fee-based fees and are turning thumbs down on commissions. So if the regulators outlaw commissions and replace them with higher fees, we advisers are all going to get a pay raise!

I still can’t figure out how this will be to the investor’s net economic benefit.

Can you?

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 above, please make sure to see me for individual financial advice based on your personal circumstances. The opinions expressed are those of the author and not necessarily those of Assante Financial Management Ltd.


Educating investors not improving financial literacy


Calls from regulators and investor advocates for increased financial education may be misguided as renowned researcher and behavioral economist Richard H. Thaler reveals that even extensive financial education yields dismal results.


According to the article (see source below), only one-third of investors (over age 50) could answer three "basic understanding" financial questions correctly:



• Suppose you had $100 in a savings account and the interest rate was 2 percent a year. After five years, how much do you think you would have if you left the money to grow? More than $102, exactly $102 or less than $102?

• Imagine that the interest rate on your savings account was 1 percent a year and that inflation was 2 percent. After one year, would you be able to buy more than, the same as or less than you could today with the money?

• Do you think this statement is true or false: “Buying a single company stock usually provides a safer return than a stock mutual fund”?



 “more than,” “less than” and “false.”



"...over all, financial education is laudable, but not particularly helpful. Those who receive it do not perform noticeably better when it comes to saving more, for example, or avoiding ruinous debt. Even more depressing, the results of efforts aimed at low-income people are particularly weak. Those who need the help most seem to benefit the least."

".. even the most time-intensive programs — those with more than 24 hours of education and training, almost the length of a college course — had no discernible effects just two years later.."


Although the article calls for simplifying the "system", in my view the author misses the most obvious conclusion of all; smart and educated investors, high net worth investors, low income investors and everyone in between, would benefit from an adviser who can simplify the financial decision making process, put a plan into place and stick with it.


Again, I have criticism for the press about "blaming the victim" for the lack of financial illiteracy. Their cognizant dissonant view is that given enough financial education, any investor will become a do-it-yourself investor and will be hooked forever more on a continuous media stream ( by subscription of course!) of financial information and products that they (and their advertisers) can and will gladly supply.


Investor advocates and regulators increasingly, are placing demands on financial advisers that financial education/information/disclosure has to be, must be, priority number one but in reviewing the dismal results of such programs, it appears that there is a severe disconnect between the press, the regulators and the ultimate consumer of financial services.


If investors do not have interest in financial things (as the experts tell us); is it our role as advisers, to force investors to learn?


The answer is yes! Advisers will be required to educate/inform/disclose as required by the regulations. Because I do love to educate, inform, disclose to my clients, this is not an onerous task for me as I enjoy doing it. However, increasingly, I see the press asking the regulators for more and more rules, more regulations...more of everything because of “confusion” in the marketplace because there aren’t enough rules, regulations and financial education about financial products...


From what I see in the trenches here, the problem has become a sort of a negative feedback loop. The press insists investors are confused and need more information, but investors are saying there is too much information which is causing too much confusion. The regulators believes (how could it be otherwise?) that to address investor confusion, more regulation is the answer. And round and round we go!


Here is a must see video that I think neatly addresses the question of financial illiteracy in real life.


If you have seen the video, are we surprised by the renowned Richard H. Thaler’s conclusions that financial education by and large, is a dismal failure or Malcolm Hamilton’s bemused view of financial literacy as being mostly irrelevant?


My theory is simple; financial education is a yawner for most folks. Financial education is a laudable goal but it is not THE goal. Oddly, in my quarter century experience as an adviser, the average financially educated investor tends to do much better than the investors that think of themselves as super smart (and say so). Invariably, the really smart investor - well they just out-smart themselves at some point.


Amidst all the cries for simplicity, simple investing in a complex world is best done with a financial adviser.


As an adviser, I do get quite excited by concepts like asset allocation and can’t wait to explain it to you over an afternoon or so. I am sure everyone will find the subject absolutely fascinating.


Perhaps in the future, it may be a mandatory discussion/disclosure requirement prior to the purchase of a GIC. It will be riveting reading...Wait...come back! forgot your study book!...



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