Opportunities Like These Are Rare

Good day,

Over the last couple of years, we preached the importance of being defensive. 

Why? Because equity markets were expensive and in some cases overvalued. It generally takes a catalyst for markets to retract and this time around it was/is the Coronavirus.

How were we defensive? As I said last week, we don’t react to negative markets as it’s too late at that time. Rather we prepare. We prepared for today’s bear market by building a healthy allocation to private securities which are not correlated to public markets. While most global markets are officially in bear territory (-20% or more with some well below that), our clients’ private securities will once again see positive returns this month thereby offsetting much of the declines in their equity allocations. 

On the equity side of things we’ve held blue-chip securities which haven’t been sold off as much as the cyclicals and small to mid-capitalization companies, as well as held pools which are tactical in nature meaning that they have the ability to overweight/underweight various asset classes based on predetermined investment processes rather than emotional trading.

Results: In analysing the performance results for many of our firm’s clients, we’ve determined that client portfolios have seen year-to-date declines of 3-7% on average meanwhile, as I type this, the S&P500 is down roughly 26% from its peak and the TSX 29% from its peak. 

Now what: Today, many equities are no longer expensive and trading at price levels we may never see again. Yes, equities can get even cheaper but as we all know, it’s impossible to predict the bottom. A global recession is likely and in fact, we could be in a recession right now but much of these assumptions are already baked into the current equity prices. Remember that markets are forward-looking meaning that they’re predicting a recession now and when investors feel a recovery is around the corner, aggressive buying will occur.

To be clear, I do not recommend investors increase their equity allocations if their asset mix would no longer jive with their risk profiles. I also do not recommend reducing equity allocations if risk tolerances have not changed. I would continue to hold existing alternative asset classes but with any available cash, back up the truck and begin loading up on battered quality companies. 

Not to be a broken record but I will quote Buffett again: “Be fearful when others are greedy and greedy when others are fearful”. It is during these rare periods in time when wealth is lost by the fearful while built by the disciplined. 

Markets will become overvalued once again sometime in the future. At that point, it will be time to be defensive again but for today, I for one will be capitalizing on the irrational behaviour of the masses.

Have a good day.

Daniel Popescu CFP, CIM, FMA, FCSI

President & CEO

“I have prepared this commentary to give you my thoughts on various investment alternatives and considerations which may be relevant to your portfolio. This commentary reflects my opinions alone and may not reflect the views of Harbourfront Wealth Management. In expressing these opinions, I bring my best judgment and professional experience from the perspective of someone who surveys a broad range of investments. Therefore, this report should be viewed as a reflection of my informed opinions rather than analyses produced by Harbourfront Wealth Management Inc.”

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