Since Brexit, markets have been relatively quiet, but a number of asset classes are at all-time highs. Brad Simpson, Chief Wealth Strategist, TD Wealth, explains his strategy on portfolio construction and asset allocation heading into the Fall season.
Here to give us his thoughts on what he is thinking about is Brad Simpson.
He's Chief Wealth Strategist at TD Wealth.
It is nice to see you.
And it's great to see you.
Well let's start off by talking about, is this real, like the end of summer come back of the markets?
I mean, does this actually matter from an investment perspective?
No, I think it does.
I think we have a long history of this cycle of kind of taking the summer off-- I mean, going back for hundreds of years-- and then going, working on the crops in the fall.
And then once we got into the kind of more modern era, when kind of savings bonds used to be something because when they used to pay something, people would buy their Canada savings bonds.
And so I think we're used to thinking about money starting in September.
So having said that, we're going to start thinking about it again.
What are we thinking?
I mean, what are we actually coming back to?
Well I think we're going to come back to an if you know-- wherever you want to look, if you open up your investment statement, you'll open it up and you'll go wow, it looks pretty good.
My stock portfolio is at its all time highs.
My bonds were kind of at their all time highs.
Then you kind of look around at things around you, and especially if you're fortunate enough to live in Vancouver or Toronto, your house is at an all time high.
And it just keeps going up and up and up and up.
If you have a lovely home and if you're an acquirer of art-- this might be a little bit out of most of our price bracket.
But art's hot, right, at all time highs.
Recently a record breaking price for William de Kooning's painting, a cool $300 billion.
Thank you very much.
Every asset that you want to look at is at high.
I think a great way of looking at this is rarefied air.
Yeah, just everything is moving up.
I know you've brought a chart here.
Let's take a look at it where you show a Fed balance sheet superimposed on the S&P 500.
That kind of explains why, doesn't it?
Yeah, really, there's no precedent and there's no correlation up until 2008 of the Federal Reserve Board accumulating debt on their balance sheet and really compelling us to go out to the equity markets.
And really where we're at today is the Federal Reserve Board drops interest rates.
Federal Reserve Board makes a comment.
We just go buy more stock.
Yeah, bad news is good news.
That's right, no matter what happens.
If things are bad, when you have a bad day, you'll know the Fed will do something, so I might as well buy today.
And Brexit I think-- you and I were talking earlier, that's a great example of that.
Yeah, talk about a crisis.
The last two days, and for the week, FTSE was up 100 basis points.
Because everybody ultimately said, well, this is bad.
It could be bad, all those things.
But, well the central banks will be there.
And it's probably a good time to go buy some more stock.
Let's take a look at this second chart you brought too, because complacency I know is something that you-- we talk about rarefied air, and also the fact that-- Brexit, the best example of complacency right now.
What is this chart showing us?
Well I think that what the chart shows us is every week, this is a giant survey done of American investors.
They go out and they say, how do you feel?
Are you bullish?
Are you bearish?
Are you neutral?
We're at kind of all time highs for neutral.
And you know, neutral is a scary place to be for an investor I think, because you're indifferent, you know.
Or I'm either scared or you're not making a decision or you're, I'm just not thinking about it anymore.
But I know in anything, even in relationships, whatever it is, if somebody says to you, well I'm neutral, that's usually a thing that you want to look at, right?
So I think the survey speaks volumes.
Let me ask, so this is that what we're coming back to.
People either are indifferent or are not willing to take any action around things right now, which I think you said can be concerning.
I know you're getting ready to launch guided portfolios in the fall.
But if you were, again, someone listening is starting a new portfolio-- and again, it's going to depend on the person, their own situation.
They need to talk to their own advisor.
But what are the kinds of things you think about when you're constructing a new portfolio?
Well I think the starting point is how you're going to do your allocation is the most important piece.
And the likelihood of what the first decision you're going to make, based on the vast majority of portfolios that people have built for themselves in the last 30 years, are that you're going to build a traditional portfolio made up of 60% stocks, 40% bonds.
And then you're going to think, what investments am I going to buy to fill those buckets, if you will?
And I think that's actually probably the wrong starting point today.
Because that portfolio works really, really well in a certain environment.
And that environment is when interest rates are going down, when earnings per share in companies is good to great, and that regulations are going down.
We went through an environment like that almost for the last 30 years.
That environment has shifted.
We are in a whole new world, an absolutely environmental shift.
We're going from spring to fall, however you want to look at it.
That so instead what you really want to look at is to say, how I'm going to allocate has got to be my important starting point.
Let me ask, you brought a chart here.
Talk about allocation.
Give me high level in terms of-- and you can dig in on it.
What is it that you're looking at like?
How do you define allocation?
How I define allocation, my starting point actually isn't at asset allocation.
It's at risk allocation.
Because one of the things that you realize is that, it looks like when you look at a pie chart that there's these barriers between risks in a portfolio.
So if I went out and I bought a Bell Canada bond and I went out and buy a Bell Canada stock, I would think if interest rates went up, that would have a negative impact on my bond because it's interest sensitive.
But I don't need to worry about my stock.
But in fact BCE is a dividend paying stock.
If interest rates started going up, it would get hit with interest rate risk just like the bond would get hit.
So that risk factors are really the starting point of where you want to delve to allocate.
And frankly, these are the greatest advances in finance today, a lot because of the power of computing and quantifying.
We can open these portfolios up now and look and see what's going inside of them.
So if I were going today, I'd say listen, I'm going to start by having my equity factor allocation.
Then I'm going to have my fixed income allocation.
I'm going to have my multi-factor allocation.
Then I have my real asset allocation.
And once I kind of map that out and I look at them and I understand that's kind of my starting point, then I'm going to go kind of sleeve by sleeve and go over them and fill that with an investment.
Let me ask you, I know we can't get into everything in terms of all the detail.
But just when you say equity factor allocation, what are the kinds of things that belong in there?
So for instance, you would have a combination of one, things like-- you would have still your core North American equity portfolio-- 25 stocks, good earnings, good book value.
You're comfortable with them-- nice dividends, things that you've always owned are probably going to be in that slot there.
You're going to have an absolute return strategy.
When you're in a world of low interest rates, your bonds aren't acting as much of a ballast for safety anymore.
So what you want to look at is having something that if something goes wrong, that has the ability to slow down the fall.
So I think you want some absolute return in there.
And for some investors, who are comfortable with more liquidity risk-- and many aren't, meaning you have to lock your money up in something for a long time, you could also be looking at private equity as well.
Fixed income allocation, what do you have in there?
So fixed income allocation, kind of a similar start to the equity side.
The things that you know, a traditional benchmark in government and investment grade bond portfolio.
Also next to that, an unconstrained one, which means that you can go anywhere, do anywhere, as long as it's based on the investment merits, it makes a lot of sense.
Absolute return-- much like the equity side, having the ability to go long and short.
And then once again if you're comfortable with more of lock up periods, longer terms, giving some of your money for five years and you don't access it again, which is typically when you have to consider when you're looking at private investments of any sort-- so a private debt investment is another category you could think about.
Multifactor manager, what does that mean?
Well you could look at a multi-factor manager as if you took the first two and you said, you know, I'll let you play in both those sandboxes.
And so you can go out and you have the ability to go through equity factor risk.
You would have the ability to fixed income factor risk.
But you could also be looking at having more potential to say: I can also work within the realm of things like FX or foreign exchange, which in some people's minds is an asset class.
And finally you've got real assets here, which I know real estate I'm assuming-- Gold.
And those, I think those would kind of the two.
And you could also look for infrastructure and an investment there too.
So given all that, and when you consider all those things-- and you talked with the different kind of risks out there too.
And you've got equity risk.
I think you talked about the income and volatility risk.
I mean, this portfolio really helps you manage the risk allocation, as it were.
Yeah, you sit back and you look at that.
And then you say, well, now I'm going to allocate amongst those.
Now I'm going to think about what are those six risks that I'm trying to manage?
And which ones in an environment like this am I most comfortable with?
So an interesting one, if you'd say well, one of those are interest rate risk, might not want to be adding a lot of extra interest rate risk to my portfolio today.
Liquidity risk, I might say yeah, I'm actually comfortable for doing that.
And liquidity risk, just for people watching, means, can you get your money out quickly?
Can you get your money out, yeah.
Because look, one of the simple rules in finance is the easier access you have to your money, the less should be the expected rate of return.
The less access you have to it, the greater return that one should be able to give you.
So if you were out looking at a, for example, a private fixed income investment, with all things being equal-- let's say they were both investment grade.
So quality investment grade, publicly traded, you would expect if you bought an investment grade private debt, you should get about a 1 and 1/2% higher rate of return from something like that.
Last question for you, given all that and what's been constructed, anything else that investors should keep in mind as we buckle up and get ready for the fall?
Two things-- one is that I wrote a piece a couple months ago that volatility can be a good thing.
It's actually a healthy thing.
And so one of the things that our belief is that we're moving into a time where volatility is going to be back again.
And it's going to be part of our world of investors.
So when that happens, know if you built your portfolio to be prepared for it, it actually can be your friend, and it doesn't have to be a bad thing.
Brad, thanks so much.
That's Brad Simpson, Chief Wealth Strategist at TD Wealth.
I'm Kim Parlee.
Thanks so much for watching.