March 01, 2016
A Different Point of View
Sometimes it's all in your point of view. With investing, people tend to focus on the performance of the capital markets. As Investment Advisors, we are often asked what our performance has been. With the focus being on the markets, that question is about whether or not we have out-performed "the market". If capital markets were the only focus, that would be the logical way to assess an Advisor's performance. Generally, people think they should be able to outperform the market if they can find a great Advisor, even though academic studies have shown that this is not possible over any reasonable period of time.
Instead of focusing only on performance relative to the market, we take a different perspective. Our primary focus is the individual goals of our clients. This means that there is no one-portfolio-fits-all. Clients require quite different asset allocations, depending on their specific needs and risk tolerance. Performance for us is the achievement of individual client objectives. We measure our performance by the number of satisfied clients.
If you focus only on the markets, there are two possible choices. You can go for active management and try to outperform a market index benchmark, or you can accept that it is difficult to beat the market and simply buy an index fund that will give you market performance less a small fee.
But from a client perspective rather than a market point of view, an investment portfolio is just a tool to do a job. It should be constructed to meet the unique financial goals of the client. In simple terms, an ideal portfolio should produce the rate of return necessary to fund expected future financial obligations at an acceptable risk, recognizing that return is directly related to the degree of risk one accepts, according to classical investment theory. If the desired rate of return can only be achieved by taking an unacceptable risk, then future spending assumptions need to be scaled back or additional investment assets must be put to work, perhaps by selling a vacation property or down-sizing the family mansion in retirement.
There are many different financial tools available to us given the various kinds of securities and asset classes that trade in the capital markets, as well as a range of insurance products. For example, if one of your goals is to leave $100,000 to your favorite charity, you could purchase a life insurance policy today and fund all the future premiums by buying an annuity. Then you would know your future goal has been financed and at what cost, with the only risk being the credit quality of the insurance company.
Similarly, if you want to fund a future payment from your RRIF that will be made, say, 10 years from now, you can fully finance it today by buying a stripped bond in the RRIF. This would lock in an exact rate of return and you can be certain the correct amount will be available at the future date with the only risk being the credit of the bond issuer, which could be Government of Canada or perhaps a provincially guaranteed hydroelectric utility.
What both these examples have in common is that they are financial tools to meet specific objectives that do not depend on the future performance of any market, or on the ability of any manager to outperform the market. In short, we think investors would do better to focus on identifying their future financial needs, then work with us to achieve a financial plan and a portfolio that can be expected to produce the required amount of return at the lowest achievable risk consistent with that return, instead of worrying about beating the market – or not.
This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell, or hold a position in securities of a company mentioned herein, its affiliates or subsidiaries, and may also perform financial advisory services, investment banking or other services for, or have lending or other credit relationships with the same. CIBC World Markets Inc. and its representatives will receive sales commissions and/or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above. © CIBC World
Markets Inc. 2019.