What happens in a single year can set up the next ten. While successful investing may not be overly complicated, there are times when sticking to your long-term investment plan can be far from easy, and this is where an advisor’s expertise and support can be indispensable.
While returns are seemingly everywhere to be had, bear markets are always lurking – as we just saw with the recent pandemic-induced shutdown of the global economy for much of 2020. A sudden drop in returns can cause investors to abandon their well-thought-out investment strategy, with potentially serious consequences. The best defense against deviating from your plan during times of volatility rests in maintaining a strong partnership with your advisor, who can guide and reassure you when the going gets tough.
The Client Portfolio Manager at CWB McLean & Partners works with client families to develop a financial plan – their future dreams and goals mapped out in a document, and the long-term investment strategy that is the funding mechanism for these goals. Currently, CWB M&P uses eight different investment strategies to build our client portfolios, all of which are actively managed by our 15-person in-house research team. Each pooled fund contains one or more major asset classes (Equities – Canadian, U.S. & International; Fixed Income – bonds, preferred shares, and cash). Asset mixes are customized to suit your individual portfolio needs.
The three pooled funds that best represent the spectrum of investments at CWB M&P are the Global Equity pool (100% equities from all parts of the world, no fixed income), the Diversified Fixed Income pool (100% bonds & preferred shares, no equities) and the Global Balanced pool which is essentially a 60/40 blend of global equites and fixed income.
To see how each of these leading strategies was impacted by the COVID-19 pandemic, we can examine what the trailing 5-year annualized return was at various points immediately before, during, and one year after the bottom of this traumatic bear market.
|Before crash||Bottom||After crash|
|5-year annualized gross returns||31-Dec-19||31-Mar-20||31-Mar-21|
|CWB M&P Global Equity (100% equity, 0% fixed income)||9.80%||2.48%||13.39%|
|CWB M&P Global Balanced (60-65% equity, 35-40% fixed income)||6.63%||1.63%||9.27%|
|CWB M&P Diversified Fixed Income (0% equity, 100% fixed income)||3.49%||1.13%||5.57%|
Source: Morningstar Direct
All returns gross of fees, in $CAD
Major equity indices bottomed on Mar 23, 2020
We use the trailing 5-year annualized return as a reasonable proxy for how the investor in each of these pools would feel about their medium-term investment results at any given point in time. (Note that these are shown before fees, as clients have different fee arrangements.) The lowest point of the bear market was March 23, 2020, so we’ll use March 31 as the nearest data point. You can see that clients would have come into 2020 with returns on target for most financial plans, and then within three months their medium-term returns would have declined by somewhere between 65-75%! This is quite a shock, and would have most investors questioning their financial plan and investment strategy.
However, as the data show, anyone who was able to stick with their long-term plan through these emotionally challenging times was significantly rewarded. Within one year, their medium-term returns were now 35-60% higher than they were going into the 2020 bear market.
Long-term results are what really matter
Medium-term results are important, but long-term results are more compelling and really tell the story. Long-term results (over one or more full market cycles) filter out elements of luck, timing, or investment style bias, and expose the true skill of the investment manager. Ten years is widely considered an appropriate timeframe to judge long-term investment performance, although in the context of a financial plan that covers the next 30 - 40 years or more, one could argue that it’s not long enough.
That aside, we can examine some 10-year trailing return data for actual clients of CWB M&P to get a feel for what the investment journey has really been like for longtime clients. Seven clients are shown here, broken into a group of four clients with Balanced mandates, and three with Growth mandates that are mostly equity.
|Before crash||Bottom||1 year after||Now|
|10-year annualized net returns||31-Dec-19||23-Mar-20||23-Mar-21||30-Apr-21|
|Balanced Portfolios (~60% equity)|
|Growth Portfolios (90-100% equity)|
Source: PureWealth, CWB M&P Records
All returns time-weighted, net of fees in $CAD
Using our internal portfolio reporting system, we can isolate trailing returns as of specific dates. Here, we can see what the clients’ long-term experience was coming into 2020, as well as on the worst day of the COVID-19 bear market. We can also see what it looked like exactly one year to the day after the bottom, as well as where they stand at the end of April 2021.
These figures are real-world, bottom line, ‘in-your-jeans’ return figures. They take into account actual fees paid, differences in the makeup of each portfolio, the timing of investment decisions over the various 10-year periods, and other choices made by the client and the Client Portfolio Manager. These are the actual results that will influence retirement plans and financial security for the long haul.
These figures tell the same story as the first example. Longer-term returns are a bit more muted than 5-year numbers and are closer to historical averages, but the pattern is almost identical: coming into 2020 with reasonable returns and seeing them cut in half in less than three months. Then, an equally sharp recovery to pre-bear market levels within a year, moving higher from there. Six out of seven clients now have trailing 10-year returns that are higher than they were before the bear market.
The value of disciplined advice
Crucially, these long-term returns are more than enough to drive the financial plans that they’re intended to fund. There’s a positive relationship between volatility and returns, so to realize higher long-term returns, clients must be willing to accept higher short-term volatility. It’s the advisor’s responsibility to help clients stick with their plans when the going gets tough. Analysis of portfolios where the plan was abandoned near market bottoms (going to cash or de-risking the portfolio) shows that long-term returns are negatively impacted, often taking years to recover to prior levels – if ever.
Bear markets are a fact of life when investing. They also represent a tremendous opportunity for a disciplined investor to improve the portfolio and enhance future returns. They occur roughly one year in six, so over the course of a 30 - 40-year investment and retirement journey, you can expect to experience 5 - 8 of them. Nobody can consistently predict when they’ll happen, or why. Instead, you can prepare for how you will get through them with the help of your advisor and their firm.
Here at CWB M&P, we each have a role to play when the inevitable occurs: Your job is to stick with the plan and discuss the future implications with your Client Portfolio Manager. Our job is to review your plan to make sure it is still consistent with your circumstances and goals. The investment team uses market weakness to fortify the portfolio by taking advantage of the chance to add new companies with better quality and outlook at great valuations, and increase positions in existing holdings that offer compelling risk/reward.
As the figures above clearly show, when the client and advisor have a sound plan and work together to stay with it – the results are compelling. What happens in a single year can set up the next ten years.