The Question of Timing
January 18th, 2010
One of the most common questions about investing is “when is a good time to invest?”. Of course as we know, markets go up over the long term, and the major risk in being out of the market is missing those gains (which sometimes come unexpectedly). Given the market’s strong psychological component, investors trying to time the market usually get it wrong and thus should stick to buy and hold. (see chart).
Long term chart of S&P; 500 Index (charted relative to percentage return rather than index level)
Of course there is a huge benefit to trying to time the market as we saw at the top of both cycles this decade; however, the question of when to get out is not the problem, it is that once you’re out, when do you get back in? Once you go down that road, tough decisions ensue. Thus, the adage, get in and stay in.
Of course, there have been periods in the market’s history which have shown flat returns, where the market fluctuates between undervalued and fairly valued (Japan in the 90’s, 1970’s). For the average investor, sticking it out may be painful, but with patience there eventually is a bull market around the corner.
From our perspective, if one is able to determine what kind of market we are in (i.e. bull, range bound, bear); there are huge benefits to managing the asset allocation internally from conservative to modestly aggressive levels of investment. We call this market pricing rather than market timing. In a bull market, prices stay overvalued for a long time. In a bear market the reverse. However, in a range bound flat market, the market fluctuates between undervalued and fairly to overvalued. What type of market will the future hold? Stay tuned, but be aware that most index funds are being driven blind and even though they may weather the storms (you may get a bit seasick though); they may not be the best investment vehicle in today’s environment relative to an active fund.
At Van Arbor we prefer not to get seasick, and have been good at avoiding the big storms. On the other hand, we also find those clear patches of sky fairly well; hence we are in a position to actively manage the funds in terms of level of investment and sector preference.
This leaves the tough decisions about capital preservation and appreciation to Van Arbor, and lets the client just kick up their feet and enjoy the ride!
The Loonie Sale
January 8th, 2010
What if I told you that you can buy shares in a company at a 20% discount to everyone else? Well that offer is now available only to Canadians, who due to a confluence of factors are the coolest kids on the currency block!
We all know how much attention the Loonie has been getting over the last couple of years, all of which is due to some very good reasons (Oil, Gold, Banking System, and Speculative Interest). However, there becomes a point when all that good news gets baked in (priced to perfection so to speak) and one has to look at the other side of the coin.
Can the Loonie continue to make international investments significantly cheaper? Sure, but the scenario for that to happen is not likely to happen in the near term; hence, we recommend investors take advantage of this sale, which won’t last forever. The best vehicle, taking into consideration global overseas opportunities, in our opinion is the Van Arbor World Fund.
Below are charts of the some of the current currency dynamics:
US Dollar sale from a Canadian Perspective (too much speculators could be an opportunity to capitalize on Loonie strength)
The US Dollar index versus major currencies (priced for doom yet hanging in there)
The MSCI World Index discounted by the Canadian Dollar strength
Japanese Yen and British Pound relatively cheap as well
Reflation versus Deflation
January 3rd, 2010
There are two major forces driving today’s market & economy, deflation & reflation.
Deflation is being driven by weaker consumer spending, the aftermath of a housing bubble, consumer & business deleveraging, and excess productive capacity.
Reflation is the counteracting force to deflation, which is comprised mostly of monetary stimulus in the form of extremely low interest rates, increasing money supply, as well as fiscal government spending.
Last year we witnessed the force of deflation, while this year we are seeing the corresponding reflation initiated to counteract it. The goal of the reflationary experiment is to provide enough of a base to the economy until the private sector, innovation, and normal growth takeover.
Will reflation succeed in the battle versus deflation? Yes, it will eventually; however, it may not do so on its first try. The force of deflation is probably more powerful than most people expect, due mainly to our high levels of debt, which eventually will force hard spending choices at the individual and government level. It is not unrealistic to see a high savings rate for the near future. Also, political pressure to reign in spending will be high.
Where does that leave us? From an investment standpoint, getting the correct dominant force in the market right will be crucial over the next few years. As with most forces that collide, or battle, the winner/leader usually changes a few times before one force eventually dominates. In the end, any bout of deflation will be likely met by a very strong reflationary response, which possibly could eventually over inflate the economy.
With two forces battling it out and certain areas of the economy lagging, a passive index approach to the market will suffer. On the other hand, an active approach to the market in terms of stock picking, sector allocation, and capital preservation should be the preferred investment vehicle in these choppy waters.
From our perspective, the Canadian Fund is the best product to capitalize on the reflationary force while still being able to protect from deflationary forces. However, the World Fund is in the special position to capitalize both on the reflationary and deflationary forces as there are more countries, currencies, and companies available to us that benefit in each situation.