Pessimism, Skepticism, Optimism, Euphoria

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1 December 2017 Pessimism, Skepticism, Optimism, Euphoria It has been said that bull markets are born on pessimism (2009), grow on skepticism, mature on optimism, and die on euphoria. I am not sure where we are in the cycle and you will get 100 different opinions if you ask 100 different people, but just because the market had a good year does not mean that it is destined to fall the next year. Having said that, we had a year of unprecedented calmness in the markets. Of course if you were watching the financial news or the news in general you may not have had that feeling of calm (Trump, North Korea etc.). In Canada the TSX was up just over 6% in price terms and just over 9% when you include dividends. The US market as measured by the S&P 500 was up ~22% in US dollar terms and since the Canadian dollar strengthened vs. the US dollar that means that US returns for Canadians was up ~17%. Interest rates rose last year, but not enough to get clients too excited about putting money into fixed income as a 5 year GIC will still only pay you ~ 3.05% and a 5 year Canadian bond will yield ~2.2%. On a personal note, years where there is less volatility are not any easier for us. We do the same amount (or more) of work and we definitely worry more. This year we did more financial planning for people and the forward rates of returns we used for illustrative purposes were generally 5% or less with 2% inflation, both would be very conservative numbers. While I generally don t like to spend a lot of time looking backwards, it can be a useful exercise to see what themes we discussed and obviously how we did. We started the year by talking about...what else, Trump. I mentioned that you have to look past everything and look at companies and the economy. Its earnings and the economy that drive investments longer term, not tweets. Companies in general and the economies in Canada and especially the US are doing well. I also spoke about trade-offs, patience and the importance of planning. In my experience the people that are the most successful employ patience, understand that volatility is normal and they have a plan. The trade-offs of investing are the volatility you will experience, or saving now vs. spending later. The financial plan is sometimes complex as it may involve multiple businesses, accounts etc. However, sometimes the plan is incredibly simple. I tend to favour simplicity, but some people s situations are naturally complex and we help them through all that using a wide range of experts. Our clients enjoy having the clarity and the peace of mind that the planning and discussion process provides.

2 So here we are in 2018 so where are we in terms of the cycle...pessimism, skepticism, optimism, or euphoria? In spite of all the gains since the financial crisis 10 years ago (yes it seems like yesterday to me) I still find that people are generally cautious. So I do not personally see euphoria in the overall markets. I would call it optimism (that doesn t mean we can t have a correction though). Two areas that might qualify for euphoria though would possibly be bitcoin and marijuana stocks. If you look at the chart of these investments they look like hockey sticks. We do not invest in bitcoin and have zero expertise there. As for marijuana stocks, it is tough to recommend them as they are relatively young companies, relatively small, and do not have the history of earnings, dividends or any of the other metrics that we look for. That does not mean that they won t go up in price (they have). They just don t currently fit in my models. Back to being cautious...yes it is good to have a healthy dose of caution but one must realize that equities when well managed will go up over time (not all the time) and will more often than not provide much better after tax returns than bonds and GICs. The trick is to have a portfolio that reflects your goals and objectives and understand that volatility is normal, how normal? Please see the chart below to see that last year was a year of unprecedented calmness...that is not normal. (I apologize for all the US data but it is the most readily available and the Canadian story is similar). Jan 2018

3 A different way to look at volatility is what are your odds of having a negative return in any given 12 month period and how big could that decline be. The chart below shows those statistics for the US market. Dec 2017 Please also keep in mind that following these declines are always periods of recoveries and beyond. The chart below shows 10 year holding period returns for the S&P year Annual Returns Dec 2017

4 In summary, please don t be surprised when volatility ultimatley returns, please also realize that good quality portfolios generally weather the storms. I begin each year with optimism as most people do. I also begin each year with a review of our big picture game plan. Where the plan will be tweaked slightly is that with respect to dividends as we will emphazise dividend growth over pure dividends, plus we always take other metrics into consideration (valuation etc.). Quality - We want to own best in class investments based on certain value/quality metrics. Diversify - Owning different asset classes can provide some relief from the storms. Dividends - We want to primarily own securities that have a long history of paying AND growing dividends/income. Upgrade - Investments where necessary. Client goals - We want to provide you with all the analysis to make sure you are on track to meet your goals. Client Service We are committed to providing the most exemplary service to our clients. With respect to goals and planning, please do not ever hesitate to call us to discuss how your portfolio is built to reflect your goals and objectives. On a personal note, not a day goes by when we are not extremely grateful for the trust and confidence our clients place in us. Last year we added a couple of new relationships so thank you for the introductions. We also had a heavy year volunteering in the community for those less fortunate which is a strong reminder of how fortunate we are. On behalf of Dominique, Susanne and myself, we want to thank you so much for your continued trust and confidence. We look forward to working with you for many years to come. Sincerely, Colin Ryan, CFA Senior Vice President & Managing Director Portfolio Manager Please click on the following links for more information about the CFA Institute:

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