April 2024 – Balance

Michelle Barkway

We built Inukshuk Capital Management to serve the needs of clients looking for a unique approach – void of conflicts of interest, commission sales and pushed products. We began by putting our own money where our mouth is. With low fees and active risk management, we help families achieve financial longevity, that’s the bottom line.

Stay up-to-date on the latest developments by following us on LinkedIn here.

April 2024: Balance

In this issue:

  • Global Equity Market Performance
  • Why Bonds?
  • Is it True?
  • 2020 and 2022
  • Ups and Downs
  • Statistics
  • Dollars
  • Sense
  • Wrapping Up
  • Health is Wealth

Global Equity Market Performance

The momentum in stocks continues. But with a bit of a change of pace. In March the S&P/TSX 60 lead the pack, up 3.7%. The other three global equity market indexes we track were all up between 2.7% and 3.1%.

Canada is still lagging the S&P 500 on the year. We discussed that in last month’s note.

The reason we have included ZMP – BMO Mid Provincial Bond Index ETF – in the above charts is because it is one of our core fixed income holdings. If you decide to read further, bonds and stocks and the ‘60/40’ portfolio are the subject of this note.

Our systems remain fully long both the S&P 500 and the S&P/TSX 60.

If you would like to stay current on our measures of trend and momentum in the markets we follow, please click here .

Why Bonds? 

This subject comes up whenever they don’t work. It was a major issue in 2022. We are getting enquiries this year for similar reasons. So where did the idea of a balanced portfolio of stocks and bonds come from?

The origins of the 60/40 portfolio can be found in Modern Portfolio Theory. Harry Markowitz’s paper Portfolio Selection was published in the Journal of Finance in 1952.

The general idea: historical analysis of risk, return and correlation between assets generate an ‘efficient frontier’ for portfolio construction.

So, investors should be able to create a portfolio to meet their goals after determining their risk preferences considering how different assets have historically performed relative to each other.

Is it True?

Like most things in markets things can be true and also, not. It depends on how and where you look. This is the kind of thing we like to do – figure out problems using data.

The idea behind investing in bonds is they are supposed to have a low correlation with stocks. Good diversifiers have a positive expected return with little correlation to other assets.

Let’s look at correlation using data going back around 20 years when the first bond ETFs were launched in the U.S.

Using monthly returns shows that the correlation between stocks and bonds is not stable. Its average is 0.02. But that is not what an investor will experience. Since around the pandemic panic low, they are highly correlated. That’s great if they are both going up. Not so much if they are both selling off.

2020 and 2022

Once stocks and bonds bottomed out in March 2020 they started behaving in similar ways.

Both provided a decent return despite all that happened.

2022 was the year many investors were questioning their sanity relative to their asset mix.

So, how often does this happen?

Ups and Downs

The following chart shows when a balanced 60/40 portfolio does better than stocks. The whole idea behind why you would invest in both. In this case the measure is drawdown, which is simply how low something goes after it makes a high. It is one of our preferred measures of risk.

Any time you see the red line above zero, that means bonds are doing their job.

Statistics

Anyone can use any statistic to prove any point. Doing that in our realm usually ends in disaster. Our models are built from the standpoint of testing a hypothesis.

Statistics can be useful if used responsibly.

A simple question would be: out of the past 20 years, in any month, how often do bonds and stocks go down together?

The answer: 17%.

How often do they go up together?  Answer: 41%

How often do they do the opposite? 42%

That is a simple way to determine if bonds diversify returns in a portfolio and it looks like they do.

What does that mean for returns?

Dollars

There is a cost to diversification. A 60/40 portfolio will, over time, underperform a stock only portfolio. What we are trying to dial in on is about what you, personally, can tolerate.

Let’s look at what it means in terms of money.

If you invested $100 in the S&P 500 in 2003 and put your head in the sand and pulled it out in March this year you had made $670. If you poked your head above the sand in March 2008 you would have noticed that your $100 investment was worth $80.

If you split that $100 between the S&P 500 and bonds, 60/40, your current gain would be $355. During the financial crisis lows in 2008 you would have had $90 in assets.

The point is: this is about paths and your personal risk tolerance. Would you rather lose $20 or $10? And when in your life could you afford either?

No one can predict the future. Diversification offers the ability to mitigate some of these personal and market risks.

Sense 

Financial solutions for individual investors have come a long way since 2003. Bonds aren’t the only way to diversify. We diversify across strategies as well as asset classes that include alternatives. Our systems drive our asset mix and are designed to raise cash when they determine that the trend in equities is not favourable. The goal is to reduce the bad kind of volatility and avoid prolonged drawdowns.

Wrapping  Up

Daniel Kahneman, who died in March at the age of 90, was at the forefront of behavioural economics. A more empirical study of behaviour as opposed to traditional economics. His work revealed the cognitive biases in human decision-making under uncertainty. He found that those decisions are often irrational. His book, Thinking, Fast and Slow does a much better job than this at describing his findings and how they have changed how we think about how we think.

No one is immune to this. Maybe a Vulcan. Being aware that it is possible to make a mistake and not know it, is a good start. It is also one of the reasons we test ideas with data and try to keep things simple.

Now over to Victoria for some thoughts on balance in health.

Health Is Wealth

Balancing Health and Wealth

In the world of finance, the concept of balance is paramount. Just as a portfolio manager designs a balanced portfolio to achieve our financial goals, we must also carefully construct a balanced life to attain overall well-being. As a wellness professional, I often find parallels between financial strategies and personal health strategies.

In this month’s newsletter, the investment team delved into the importance of a balanced portfolio for investors, emphasizing the significance of assessing risk tolerance and objectives to achieve the right mix of asset classes. The same principle applies to life. Just as a young investor can afford to take more risks with a more aggressive asset allocation, we must tailor our health strategies accordingly at different stages of life.

Consider a young professional embarking on their career. With ample time ahead, we may focus on building a strong foundation of health through exercise, nutrition, and stress management. This proactive approach lays the groundwork for a vibrant and fulfilling life ahead.

Conversely, as we approach retirement, we may need to adjust our health priorities. As the pace of life changes, so too must our health strategy. While we may have more limited time for intense workouts, we can prioritize activities that enhance flexibility, joint mobility, and overall well-being. By adopting a more conservative yet sustainable approach to health, we can enjoy a fulfilling retirement free from unnecessary physical limitations.

But how do we ensure that our lives are truly in balance? Just as investors periodically review and rebalance their portfolios, we must take a step back from our busy lives to assess our overall well-being. This requires a deep introspection to identify personal goals and values, allowing for a clear understanding of what an ideal life looks like.

Once these goals are established, it’s essential to evaluate whether our current lifestyle aligns with them. Are we prioritizing our physical and mental health in a way that supports our long-term objectives? Are we allocating our time and energy effectively to pursue our passions and nurture meaningful relationships?

If the answer is no, it’s time to take proactive steps towards achieving balance and harmony. This may involve making small yet significant changes to our daily routines, such as prioritizing exercise, improving nutrition, or setting boundaries to manage stress effectively. It could also mean seeking support from professionals such as personal trainers, nutritionists, or therapists to guide us on our journey towards optimal well-being.

Ultimately, achieving balance in life is a continuous process, much like managing an investment portfolio. It requires regular assessment, adjustment, and a commitment to prioritizing what truly matters.

‘You have to sustain it, to maintain it’

Victoria Bannister
ICM Health Ambassador

Have a question?  Contact us here

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