Cameron Passmore CIM, FMA, FCSI

Portfolio Manager

Benjamin Felix MBA, CFA, CFP

Associate Portfolio Manager
  • T613.237.5544 x 313
  • 1.800.230.5544
  • F613.237.5949
  • 265 Carling Avenue,
    8th Floor,
  • Ottawa, Ontario K1S 2E1

Infographic: SPIVA Canada Scorecard 2013

By: Ben Felix | 1 comments

"Investing success isn't about beating the benchmark, it's about not losing money"

A couple of months ago I saw John Wilson, CEO of Sprott Asset Management, speak at an alumni dinner; we both graduated from the Sprott School of Business at Carleton University. Despite our common education, we come from different schools of thought on investing. When John was speaking, I tweeted some of the things that he said. Looking back, one quote that I find particularly interesting is, “Investing success isn’t about beating the benchmark, it’s about not losing money.”

I understand John’s sentiment from a behavioural point of view, people don’t like to see the value of their account decrease. It is, however, imperative for investors to have an understanding of the difference between volatility and risk in order to have a successful investment experience. Although a riskier investment will tend to display higher volatility, there is an important distinction to be made between the two terms.

Volatility relates to the dispersion of market returns over time, or the tendency of the value of securities to move up and down as new information develops. Over long periods of time, the indexes that represent the market have tended to increase in value despite periods of volatility. Investors expect higher returns for holding more volatile investments.

Risk is the risk of losing money, which ultimately means either selling out of the market when an investment’s value is below its original purchase price, or having an investment’s value go to zero. The first risk is behavioural and the second is the specific risk attributed to a particular investment, called non-systematic risk. An example of non-systematic risk is the risk of a company going bankrupt.

The non-systematic risk of any individual investment can be almost completely eliminated from a portfolio through proper diversification. The biggest risk that investors face is themselves, their own behaviour. John Wilson’s idea of ignoring benchmarks in favour of not losing money is feeding directly into the psychology that causes investors to make bad decisions based on their emotions. Buying into this mindset causes investors to accept returns below the benchmark because they do not understand the distinction between volatility and risk.

It is the job of a professional money manager to construct a portfolio with a tolerable amount of volatility over an appropriate period of time for a client’s particular situation and preferences. When this is done properly, the investor will be positioned to capture the returns of the market without the risk of their own behaviour getting in the way.

By: Ben Felix | 0 comments

How efficient do markets have to be to make picking stocks a waste of time?

Capital markets are a highly competitive platform where millions of buyers and sellers are able to weigh new information and voluntarily enter into transactions. In any transaction, there has to be a buyer and a seller; if there are no more buyers at a given price, the price will go down until more buyers emerge. The same thing happens in the other direction, and that is what makes prices go up and down. Market participants enter into transactions based on some piece of information that is influencing the buyer to think a security is worth more than its current price, and a seller to think a security is worth less than its current price. By entering into transactions, participants are contributing their best guess to the actual fair value of a given security. Neither party may have the exact right price, but the combined guesses of all participants becomes the best estimate of the fair value. In a perfectly informationally efficient market, all available information will be included in the prices of securities, but markets don't have to be perfectly efficient to make picking stocks a loser's game.

The idea of picking stocks revolves around someone's ability to determine that the current price of a security does not reflect its fair value. A person may decide that the current price of a stock is too low in which case it is a buy, or that it is too high in which case it is a sell. When the market corrects itself to reflect the fair value, the investor will profit. The problem with this, though, is that even if it is possible to accurately determine at a given point in time that a security is mispriced, the new information that is constantly being acted on by other market participants will render any prediction at some point in time useless. The ability of anyone to outperform the market will only be realized as randomly as the development of new information which, by definition, is random; we can't predict the future. Even if markets are not perfectly efficient, intense competition gives them the ability to incorporate new information into prices. Under these conditions, picking stocks is foolish at best.

By: Ben Felix | 0 comments

What are the odds?

Achieving your financial goals doesn’t happen by chance, it happens through disciplined savings plans, long term goals and a well thought out financial strategy. With an infinite number of future possibilities, it’s important to understand the likelihood of scenarios and have reasonable scale as to what to expect over a portfolio’s lifetime. Thankfully there is a tool that runs thousands of simulations using a proxy for market volatility to give scope as to what is practical for long term financial planning. This tool is called the Monte Carlo analysis.

The Monte Carlo analysis is an easy to understand tool that is used to effectively explore the relationship between risk, return, cash flows, and portfolio longevity. The analysis uses the cash flow requirements of the portfolio, the expected returns of the market along with the market volatility to simulate a high volume of possible scenarios. The simulations are not predictive, but large numbers of simulations can reveal a realistic estimate of a range of possible outcomes for the portfolio’s lifetime.

The Monte Carlo analysis simulations use pseudorandom numbers constrained to the volatility characteristics of a probability distribution (usually a normal distribution) to help model potential outcomes of the stock and bond market. Using this simulation engine along with market expected return data, explained in this white paper from our own Raymond Kerzerho and Dan Bortolotti, the simulation can be paired with cash flows to give a realistic probability of portfolio longevity. The resulting data can then be used to evaluate the probability of best/worst case scenarios and the probability of achieving a financial goal. For example, if you have a monthly withdrawal plan of X dollars and you want to know the probability of an equity portfolio having Y amount of dollars on date Z, then the Monte Carlo analysis is perfect for you!

The Monte Carlo analysis is an effective tool that can be used to contrast the different risks/rewards of various asset mixes and the consequences of withdrawal rates/cash flows on the portfolio’s lifetime. 

Please ask your advisor about this tool and how it can be used in your own financial plan.

By: Max Lane | 0 comments