Back in late November, we wrote a Market Commentary entitled “Turbulence” and mused it was “time to buckle up”. In the late summer (August 26th to be precise) we had started to meaningfully decrease risk exposure in the portfolios. We took further steps on December 17th to de-risk by shifting to less volatile companies within our equity models. We did not see the future (let me be clear on that…) nor are we trying to “time the market” as we believe this to be a futile effort. Rather, we are applying our risk management discipline combined with our tactical allocation strategy all within the parameters of your chosen model portfolio and risk level. That said, and as it turns out, this was a wise decision as markets have continued a severe cyclical decline. The start of 2016 has seen some of the worst returns in years.

Our advice? Stay invested and ride this turbulence out. This is what all great investors do – they have confidence in the businesses they own and they won’t be scared out of their positions when others start to sell. Frankly, it doesn’t matter, in the short-term what the market screams the businesses we own are worth… it may be far less than what we want it to be, but we know that, in time, the market’s confidence will return (even euphoria will come again) and prices will rebound. Staying invested will drive long term returns.

We’ve seen these cycles before and we know we can add material value by capitalizing on volatility such as this. We’ve said this many times in the past, but on days like these it’s worth repeating: Volatility is the friend of the investor who knows the value of a business and the enemy of the investor who doesn’t.

So, what’s been happening? (Keep reading to find out how our models – your investments – have performed…)

Well, we’ve seen softer global growth, China has capitulated and is losing export dominance while trying to devalue its currency, interest rates are threatening to rise (although we suspect that risk is decreasing substantially now) and we’ve seen a steady decline in Central Bank stimulus.

Energy’s drag on Canadian stocks has shown no signs of abating and we are now enduring the longest losing streak since 2002. Canadian equities have lost 6.4% to start the year and over the last 12 months they are down over 14%. US equities have are off over 4% to start the year.

Crude oil declined to a 12-year low dropping, for a moment, below $30 a barrel and currently sitting at around $30.56 (Wednesday close).

The Canadian dollar has suffered alongside this energy decline and now finds itself just above $0.70 US. Tough times for the Canadian economy and for Canadian tourists as well. This cartoon, forwarded by a client, nicely illustrates the present situation for those hoping to travel down to the US:

The New Year has brought more volatility in part due to anxiety about global growth (i.e. China) and relatively high valuations on stocks based on earnings that are reportedly to be lower than anticipated this year.

So what are you to do?

Well, the key question is: has your risk tolerance changed or do you think it is still properly assessed? If it is still accurate, then I would humbly suggest that you ride this out… close your eyes and check back in about 6-12 months from now. (I say this with some element of humour and some – or lots of – truth). If your risk tolerance has indeed changed or you think it has been incorrectly assessed, then we need to make an allocation change.

One of the worst things you could do now would be to react in fear to the market conditions and make an exit… only to change again when conditions are perceived to be improved. That’s a sure recipe for continued stagnant returns.

It’s very important to understand that this is what markets do and while I can’t guarantee 2016 will be a positive return year, I do firmly believe that staying invested in the quality businesses we own and riding this out is the best way to grow capital over time..and it WILL grow over time, despite the panic setting in again now. This type of panic is cyclical and norma. We won’t be able to produce positive returns ever year, but we will mitigate the downside moves and we will produce solid returns over the longer-term.

So what have our models done in this wild environment?

Despite how wild things have been, here are our short-term return numbers. Over three months, our Balanced (medium risk) model is down 1.6%. The TSX is down over 11% in the same period of time. The TSX is down over 19% in the last 9 months and we’re down just over 4%. I don’t like any negative returns, but this is really stellar downside protection and it bodes well for producing good long-term returns when the markets recover.

This downside protection has been achieved by lowering equity exposure slightly and by swapping out higher risk equity positions for higher quality, lower volatility investments. These investments are ones with strong earnings reliability and strong balance sheets with low leverage. They also have a sustained competitive advantage and operate in sectors that we can clearly identify a long-term theme that will support growth and expansion.

Tune in to our webinar in a few weeks (details to be sent out soon on how to register) to find out more details on our trading strategy and performance numbers.

The best course of action is to sit back and continue to let the portfolios work for you – we’ll endure this downturn together and come through it stronger than before if we maintain our discipline and investment philosophy. I truly appreciate the trust you have given to me as we team together to achieve your goals. On that topic, I thought you might like to see the results of this survey from Environics. It shows that investor behaviour is often the cause of sub-par returns over time and using an advisor to help you stay the course is very important:

Well, there you have it. I’d love to help you stay on track and help you avoid doing the wrong thing.