October 2022 Quarterly Investment Update

Hurricanes and Headwinds

The third quarter saw strong markets in July replaced with negative sentiment in August and September. In the aftermath of two hurricanes striking Canada and the United States in the past two weeks, I am reminded of the headwinds that push down the prices of the valuable assets we own in our investments:

  1. Higher interest rates. The US Federal Reserve and Bank of Canada have continued their pursuit of higher interest rates to bring inflation back under control. The Bank of Canada overnight rate is now 3% higher than it was at the start of this year. These higher interest rates, while a good thing, raise borrowing costs and can impede the growth prospects of real assets. A $1,500 monthly mortgage payment in 2020 could finance a $350,000 mortgage. Today it can support less than half. (Source: Federal Reserve Economic Data)
  2. Recession fears. Higher interest rates have already taken a bite out of global economic growth. Lower growth can lead to lower profits and compress the value of businesses we own in our mutual fund portfolios. 
  3. Ongoing political uncertainty. As expected, the war in Ukraine lingers on. Uncertainty is the enemy of investment and prevents investors from deploying assets into businesses. Steps toward resolution will reduce uncertainty and market volatility.

Emotion Battling Our Beliefs

It is inevitable that these lower prices evoke an emotional response and may lead us to question the wisdom of our investment strategy. This is normal and to be expected – and it is (again) at times like these that we benefit by drawing on the things we know to be true and will continue to be true in the future. Here they are:

  1. Active management can protect you on the downside. When markets are up, investors tend to prefer higher-risk investments such as a pure index ETF (S&P 500 index down 24% YTD), highly-leveraged growth stocks (NASDAQ index down 32% YTD) and/or speculative assets such as Bitcoin (down 57% YTD). We are never pleased when the value of your investments goes down in the short-term – and we are very pleased with many of our actively managed portfolios that have performed substantially better than these higher-risk investments
  2. Our moment of greatest investment opportunity usually approaches when prices are low and uncertainty is high.  This is a very difficult truth to embrace for most investors because a decision to commit to a good investment at a great time is often a lonely decision and filled with uncertainty. At the same time, a decision to remain committed to a long-term investment plan is easy when markets are up, and difficult when they are down.
  3. We are willing to adapt your investments to a changing environment. In this regard, we have a renewed appetite to use interest-bearing investments such as savings accounts to grow your capital. We have access to the CI high interest savings account that is now yielding over 3%. If you are holding a substantial balance in your bank account, I encourage you to speak to us about this investment.

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