Thoughts on portfolio returns for 2016

21 April, 2017

As Financial Advisors, one of our jobs is to manage clients’ investments. It’s important that we help our clients understand what they might be able to expect from their portfolios, and it’s also important that we manage our own expectations.

As Financial Advisors, one of our jobs is to manage clients’ investments. It’s important that we help our clients understand what they might be able to expect from their portfolios, and it’s also important that we manage our own expectations. The stock markets can change very quickly, and yet the game we play is a long term one – this conflict must always be remembered when we help provide the context to past investment performance, because that can shape the investment decision-making that follows. Emotional decision-making is the bane of any investor, but sometimes it’s hard to look at things objectively when they didn’t go as expected. For us, 2016 was such an example, as we saw very muted portfolio returns for many of our clients. There are a few reasons why this was the result.

  1. Canadian markets performed better than many analysts, us included, had expected. We had positioned our clients’ equity conservatively in Canada.
  2. Many types of fixed income (bonds) did not fare well in 2016. This is the primary asset class we use to protect clients’ investment portfolios, especially for those of you nearing retirement or already withdrawing income.
  3. Many active managers – those at the helm of most mutual funds in Canada – underperformed the market as a whole. Chalk that generalized result up to a style/approach that didn’t mesh with what was most successful last year.

None of the above meant that clients didn’t see investment gains last year, but those items certainly needed to be taken into account when discussing strategy for the year ahead. As Joshua Brown, an investment broker for Ritholtz Wealth Management says, it is easy to look at a portfolio that has underperformed expectations and ask “why am I holding X, Y, or Z, which are doing nothing? Or, worse than nothing, why are we holding anything that’s going the wrong way in this market? The obvious answer is because things change, faster than you can adapt or see the changes coming.”

A better answer is that today’s laggards can quickly become tomorrow’s big winners.

So, is it time to shift equity back to Canada and move away from the US and some of the international markets? Is it time to reduce bond positions because equities are doing well and bonds lagged in 2016? Year to year, the top performing asset classes can change drastically, and to try and chase returns based on past performance is a dangerous – and usually very ineffective – way to try and increase portfolio returns.

This is especially true for clients that hold larger bond positions. The role of bonds in any diversified portfolio is to reduce equity risk and provide consistent income, and it usually takes falling stock prices to remind you of exactly why you hold bonds in the first place. Bonds have good years and bad years just like stocks do (though their bad years are soft in comparison). They aren’t nearly as flashy, but they will help your portfolio maintain its course and make sure you still feel comfortable when (not if) markets recede again.

To quote Joshua Brown once more: “You don’t need a parachute to go skydiving. You need a parachute to go skydiving twice. Allocate assets accordingly.”

Sources: MSCI, Forbes, Fidelity Investments.