In this premiere episode, host Peter Ward discusses market volatility with Manulife Co-Chief Investment Strategists Macan Nia and Kevin Headland. Learn about: • The importance of staying invested during market volatility • The difference between growth and value companies, and why it might not matter. • Investment strategies, such as dollar-cost averaging
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00;00;10;28 - 00;00;34;13
My name is Peter Ward and welcome to the Solutions to Go podcast. Your source for Information on investing, insurance, banking, tax planning and Healthy Living. If you'd like to know more about anything discussed on this podcast, please visit my solutions online dossier where you'll find a wide variety of articles and videos. Today, we are pleased to sit down with two people that I've known for years, Kevin Headland and Macan Nia.
00;00;34;29 - 00;00;58;06
They are co-chief investment strategists for Manulife Investment Management. Needless to say, with the recent turbulence in the markets and the headlines causing more and more volatility each day, we had a lot to discuss. What stuck in my mind is that no matter what happens, it's important to keep things in perspective. It's easy to have a knee jerk reaction and sell out of the markets when things are bad, and the headline news is just making it worse.
00;00;58;14 - 00;01;19;02
Portfolios can lose a lot of value, but one of the most valuable investing lessons I've learned and more than once, I might add, is that it's impossible to time the markets. You have to remember why you're investing in the first place. Your time horizon and your tolerance for risk. In the fullness of time, those headlines will look like small dips on a graph.
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Let's dive into the interview with Kevin and Macan and they can take it from here. Welcome to the show.
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Thanks, Peter. Thanks for inviting us.
00;01;28;01 - 00;01;33;04
Maybe just take the listeners through a high level, look at your roles at Manulife, what you do on a daily basis.
00;01;33;22 - 00;01;59;05
Yeah. So I guess I can start in and Macan can follow. So, our goals over the last dozen plus years, I would say, is really to provide information to financial advisors to help their clients make better decisions for their portfolios. You know, we're not portfolio managers. We don't buy and sell stocks or bonds. We're all about educating. You know, we're trying to get 30,000 foot view at the world and try and help provide information for those advisors.
00;01;59;14 - 00;02;16;02
Yeah, in a nutshell, I think, Kevin, I wake up every morning trying to find where the best opportunities to invest are for our clients. And then our goal, our ultimate goal at the end of the day, Peter, is to educate. It's to inform, empower advisors, to make better decisions for their end clients.
00;02;16;10 - 00;02;38;20
And today we're going to kind of have a look at the economy, how it's doing, economic conditions and an overall overview of the markets. We're just kind of trying to pick away at the current issues and what's happening right now to get a better understanding of the economic factors at play. I want to talk a bit about the economic conditions we're facing today.
Inflation is top of mind for a lot of people, not just for investors, but at the grocery store, the hardware store, the car dealership. Obviously, central banks around the world have clear goals when it comes to keeping inflation around a certain number. And they're actively raising their funds rate to cool inflation. Are the central banks bringing a knife to a gunfight?
What I mean by that is if all you have is a hammer, then everything looks like a nail. To the outside observer, it looks like supply chain issues were driving up the price of goods. And the war in Ukraine is driving the price of energy up in Europe. These numbers are pushing up headline inflation, but raising the overnight rate and making it more expensive for companies to borrow isn't going to bring down that headline inflation number. That seems to be driven by things beyond the central bank's control.
00;03;21;07 - 00;03;48;22
I think sort of banks are doing exactly what they need to do. You know, it’s not a knife to a gunfight. They're doing what's in their power to try and control inflation. I think the one perhaps error or mistake is they're behind the curve and they started too late and they're playing catch up right now, which is why you're seeing these supersized rate hikes, you know, 75 basis points, a hundred basis points, which tends to shock the average person, especially when it comes to mortgages or other borrowing costs that are actually increasing. But the absolute levels are not surprising. You know where they are. Interest rate hikes. So, they're doing what they can. I think there are some things that are out of their control and they realize that, such as you said, supply chain disruptions or the invasion of Ukraine and the impact on food and energy costs. But they're doing what they can. I think they're doing a pretty good job, except they're a little late to the game.
00;04;08;17 - 00;04;31;04
It's easy to make a case that they should have been raising rates in the middle of last year when you look at global economic activity. We peaked in the middle of last summer. So, they should probably should have been raising in small increments at that point. But it just points to their uncertainty in terms of whether the global economy had really fully recovered from COVID. So as a result of being slow to fight, now they're required to raise rates. And your rate, it's not going to have an impact on inflation. It's not going to have an impact on energy. It's not going to have an impact on food inflation, but is going to impact what they can control. And that's on the demand side. And at the margin, that's a good news story for the broader economy.
00;04;53;15 - 00;05;18;26
So that's really kind of shoehorning in with all of the other indicators that I'm noticing out there. I mean, obviously, I think all Canadians have noticed the price of gas is coming down. It doesn't seem like those supply chain issues are, although they're still there, it doesn't seem like they're making the headlines as much anymore. Is that something that your team sees on the horizon? Maybe a softening of these headline indicators, and maybe as those supply chain issues ease and COVID starts to fade into history, do you see some of these upward price pressures relenting in a way?
00;05;33;04 - 00;06;12;21
For example, we have a proprietary inflation model that, in our view, tries to map inflation over the next year and factors we think that make up inflation for the for the average consumer. So it's the technical word is owners equivalent rent is the cost of living somewhere. We also use commodity prices, wage growth, the dollar. And when we input costs or levels out today, we actually see inflation trending lower through the rest of 2022 and trending towards 4 to 5% by year end in the U.S. and 3 to 4 by the summer of next year. There's other measures of inflation, I think you mentioned, Peter, gas prices. So there's a commodity price index that factors in all commodities. So nickel, gasoline, copper and so on, that is down 15% since last summer. There's a small business survey, so they ask small business owners, are you planning on raising the cost of your goods? And that index is at 56 versus 66 at the beginning of the year. So these are just a couple of small examples that point to that. Inflation's likely peaked, trending lower. I think the debate is how quickly it's going to go back to levels pre-COVID. But as investors, the fact that the trend is now going lower as opposed to the trend at the beginning or for the first half of the year, being upwards is a good news story for investors.
00;07;04;20 - 00;07;29;00
And if you just look at the U.S. natural gas average pricing, you're down from almost $5.50 a gallon to under $4.50 a gallon. We're not where we were beginning the year, but again, that reduction is going to start to cause some disinflationary forces and you're going to see inflation start to slow. And as Macan said, you know, we can argue and debate the levels, but the important thing is the trend. And I think we're going to see inflation start to slow over the next 6 to 12 months.
00;07;34;17 - 00;07;53;22
Other headlines are moving the markets to though the war in Ukraine, COVID policies in China. Obviously, these things are difficult things to deal with on the ground as investors do. We have to see past that and stay in the markets. And so, one day we look back at a graph line and say there's the dip from the invasion and there's a dip from when the Fed did a big rate hike. The same way we look back now in the dot com crash and the financial crisis crash and recoveries. Is this a lesson in understanding your time horizon?
00;08;02;05 - 00;08;25;20
We've always say there's always reason to sell. There's always a headline that would drive investors to get out of the market, sell investments. However, when your goal is growing your investments, you can't do that by sitting on the sidelines. And you can never time the market perfectly. So, it makes sense to stay in the longer term. The longer you hold your investments, the better probability you have of being positive. Investing is a probability game. There's no guarantees, unfortunately, for the S&P 500, for example, since the early fifties. It's essentially a coin flip as to whether the market is positive or negative on a yearly basis. But if you go forward through any three-year period since the early fifties, you have an 85% confidence or probability that the market will be positive over that three-year period. If you go to ten years, you have over 95% confidence. So, I think it's important to try and avoid the headlines and keep focus on the goal at hand, whether that be retirement, education, whatever it may be, focus on that goal and hesitate to make those knee jerk reactions based on headlines.
00;09;05;19 - 00;09;28;16
Yeah. And I think investors have to ask themselves why they're invested in the markets to begin with. Is it because they love the day-to-day volatility like they get a kick out of it? And I think the majority of listeners would say no. The reason that they're invested in the markets is that over the long run, it's provided a return for them to meet whatever their financial goal is. And that hasn't changed. We know markets are up nearly 80% at the time and the average return, for example, since the 1980s, the average yearly return is 10.3%. Now, that's not all in a straight line. Obviously, there's peaks and valleys, but it shows why we invest in the markets is because over the long run, it allows us to make the lump of money we have today grow into a lump of money we want in ten years to really buy or have our hopes, dreams and wishes when we retire. Now, yes, markets are up 80% of the time, but the ride is never smooth and every year we get a sell off. Now some sell offs are bigger than others, but it might come to the surprise of many that we typically get two 5% sell offs in any given year, and we typically get a correction or a sell off of greater than 10% every two years in a bear market that we're getting now, obviously doesn't happen as often, but what happens after each one of these bear markets is the next bull market. So I think when we're seeing these headline negative, negative news stories and as humans, we may want to react to the negative news, we have to take a step back and look at the big picture and re-educate ourselves in terms of why we're invested. And it's because the eyes, Kevin said investing is a probability-based decision and probability states if you are in it for the medium to long term, that the odds are overwhelmingly in your favor, really being able to meet your hopes, dreams and wishes down the road.
00;11;06;26 - 00;11;33;28
Great. Yeah, I really think that puts it into perspective for investors. So, let's take a little bit of a deeper dive into the markets. Now we know that the markets are not the economy, but lately it feels like there's been a shift. So, I just want to talk quickly and touch on growth versus value when we were COVID and the funds rate was near zero, cheap money was flooding the economy. We had a rise in everything. It was quite a big rally. And, you know, things famously became meme stocks and everything went to the moon. But now we're seeing interest rates rise. It feels like investors and markets are starting to shift. It feels like people are saying, well, financial conditions are tightening and maybe these debt laden companies with zero earnings aren't where we need to be. I wonder if you guys can just touch on the difference between growth versus value stocks as it really feels like where we're kind of rotating in to a more value oriented market?
00;12;07;19 - 00;12;28;28
You know, I've been in the industry for the better part of 20 years now. I, I hate the comparison. Growth vs. value. I think it's too much of a simplistic way to look at things, but ultimately what we're talking about growth stocks in the in the mainstream media, they're talking about companies that have perhaps less predictable long-term earnings or growth rates of those earnings. So, you know, those are the companies that are a bit lumpy in earnings and uncertain where value stocks, perhaps more predictable earnings, they're the boring companies. Perhaps they you know, they're not exciting. You know, it's like watching paint dry as they go up slowly over time. But often that's the best investments. Right is watching paint dry. So, I guess these say we're going to grow for value. And what I would say is we're looking at this market is where you want to own quality businesses. And those quality businesses tend to be on the value side of the mainstream media connotation because they're the more predictable companies, you know, the less exciting, perhaps business is. But the ones that have the big market shares and they're in their respective industries, low debt, there just tend to be quality businesses and they compound over time. They're not up 30, 40%. You know, they're not the fun company to talk about it at your next party or gathering with your neighbors over beers. You know, that's not what you want to talk about, but those tend to be the winners over longer term.
00;13;31;29 - 00;13;53;04
There's challenges in terms of putting a company or anything into one or two buckets and that's the way we should look at it. We should just be owning good businesses that have flexibility, especially in an environment like this, where inflation, yes, is trending lower. But is still at elevated levels. We have an uncertain interest rate environment or just generally uncertainty. So you want to be invested alongside companies that have more certainty in terms of their business models. And I think that's more of what how we should be looking at. It is as opposed to growth or value is just investing in quality businesses, despite what the financial media might say it's a growth company or value company.
00;14;14;02 - 00;14;30;29
That's great. Yeah, that's I was just going to ask, like, what? What's the blueprint for a high quality company? But I think you've explained it. And, you know, maybe we can just talk a little bit about, you know, fund managers and how they would identify that. I mean, there's a lot in for a personal investor. There's a lot of work in finding a company like that right? It's financial reports. It's, you know, earnings calls, it's meetings with management that obviously they wouldn't be able to have. But maybe that's where a fund manager has the edge there to find those quality companies. Is that right?
00;14;43;21 - 00;15;03;03
That's their expertise. Right? That's why they’re the experts that's why they're managing money. You know, that's I almost often call you know I use of airplane analogy that the portfolio or your investment portfolio is like an airplane right? And your portfolio manager or your financial advisor are the experts and the pilots, right? They're creating the quality of the plane and flying it. So I think that's important to understand. They’re the experts. That's what they do day to day. That's why they're in the jobs they have. And that's their goal is to cover these businesses. And ideally pay less than they're worth. And that's why they grow in and grow into their value over time and create performance over time.
00;15;21;19 - 00;15;39;06
So, I know you'll be familiar with this question because we just covered it in your excellent podcast called Investments Unplugged. So, everyone out there, give that a listen to. So, we've had a pretty big correction in the markets and people out there might be sitting on a lot of cash and wondering when's the right time to deploy some cash from the sidelines? But there's still a lot. And of course, there always will be, you know, macroeconomic events that introduce systematic risks that are going to play out in the markets. So, what's the strategy today? If you're if you're sitting on cash and you're waiting to invest, you know, what's to say there isn't going to be a the ten or 20% drop or what's to say that it's just going to take off from here? You're not going to be able to get in. Is there a way to mitigate that risk?
00;16;01;24 - 00;16;26;11
The bigger risk for investors, long term investors today is not the next potentially 10% sell off. And Kevin and I are not going to record this with you and say that we might not get another 10% sell off. We might. But the bigger risk to investors and reaching their financial goals is not the next 10% down. It's making sure that they're fully invested for the next bull market. And how do we do that? Because the reality is, is we know we should be investing in times like this. But when you have markets down, it creates a paralysis of investors. So, what Kevin and I have found and the research indicates is a good way of allocating cash into a market that's uncertain is through a dollar cost average strategy. And what that means is you have a lump sum of money. You say, I want to allocate this lump sum of money over this period. Let's just say it's over three or four months. And every week you put in a little bit of that. And if markets, let's just say, sell off that 10%, you put the rest of it in at that point. And what that strategy does, it kind of protects us from ourselves, our brains. Right. Keeps the psychology out of it, of you know, trying to time the markets. And you've heard this again and again. It's not timing the markets. It's the time in the markets. And I look at last year as a good example, it's hard to think of now, but the S&P 500 was up 26% last year. But if you missed the best ten trading days and to put that into context, Peter, there's roughly 250 trading days in a year. So, if you miss out on the best, ten year return went from 26% all the way down to 5%. So, it's impossible, As I’ve said, to try to time the bottoms, but it's making sure that you're fully invested for the next bull market. That always happens after a bear market and dollar cost average, from our perspective, is a good way to really remove our brain from the decision making.
00;18;00;23 - 00;18;17;23
Yeah, I really think you hit the nail on the head there when you say we save ourselves from ourselves, because I know in the past have invested a lump sum and I just get so anchored on that one price that I paid for it. Right. And everything is based off of that. But you know, if I did it monthly or weekly, it would average out the cost of that investment. And I wouldn't have that number to focus on. So I think that's a really good strategy.
00;18;22;05 - 00;18;43;27
Yeah. Peter It's funny, no matter what you do, there's gonna be buyer's remorse, right? In everything you buy, you invest. It doesn't matter, right? But as you said, it's over time. And there's an old adage that says bull markets never let you in. Investors are sitting on the sidelines following a recovery off a bottom, expecting another shoe to drop, another opportunity to get back in. Meanwhile, they missed that upside. You know, I go back to March 23rd, 2020. The S&P 500 was down 35%, roughly from its peak. And we were all wondering how much further it could go. And yet that was the bar, the market. The market never went lower. So, if you were getting money in, you know, even if dollar cost averaging in, you missed an extremely strong bull market. And this happens every time you see a market sell off and you see even the smartest investors, professional investors missed that opportunity, even the best kept on the market. So why should we bother trying to time to market over time, you know, continue on your path to your goal, stay on the sidelines, will not help you get to that goal.
00;19;40;15 - 00;19;53;25
So we're going to transition now into the big question it's just something to show a little bit of humanity. And so, the big question this week is what was your biggest mistake while investing and what did you learn from it?
00;19;54;09 - 00;20;19;25
Yeah, I think over time and I've made it a few times because I think I'm learning, but I never do learn. Is picking individual securities, you know, and I think I'm getting a good price and it's just probably not the right thing. You know, I should be investing in active managed securities or portfolios. My biggest mistake also is perhaps too much hubris. And early on in my career, I invested in Nortel options, call options, and I was proud. I was I thought, you know, I was up a decent amount percentage wise, not dollar wise, because it was early in my career, I didn't have the money to invest, but I, I had made a good return and I thought I could make more. So I kept going. And unfortunately, the way options work, when they expire and expire worthless, you lose all the money you invested and that's what happened. So, you know, sometimes a bit of humility. And when you're up and taking profits, that's probably the best decision. Reallocate capital, take profits where they exist, and you do better over time.
00;21;03;10 - 00;21;33;01
I think for me it was a lesson early in my career is as investors were paid to be optimists versus pessimists. And I learned this lesson because I was very early in my career during that great financial crisis, not to relive that horror, but markets are down 56%. Major U.S. international financial institutions are going bankrupt. You remember going into the office every day, major markets were down 5 to 7% a day. And that had an impact on me as a young investor. And I kind of came out of the great financial crisis with a lens that was slightly bearish, and I learned very quickly I'm more likely to be rewarded as an optimist than a pessimist. And as I have said, is in any rolling five year period over the last 50 years, the odds of the markets being positive, the S&P 500 is 87% versus 13%. So, we’re afraid, I think when in periods of short term volatility and negativity, we extrapolate those returns forward and that often comes at the detriment of our returns. So that's one thing I learned very early in my career is because the statistics back it, 80% of time markets are up and so on. So that's one thing I learned very early in my career and it's actually served me well during these type of sell offs is I remember back to those periods and think, okay, it was much worse pothead than it is today. And we made it through that and we had a subsequent amazing ten to decade afterwards. So that's the big lesson I've learned in my career.
00;22;41;13 - 00;23;03;20
And I think that puts you in a great mindset for investing going forward, right? Like if you always remember that, like it's, you know, it's always going to get better. It's, it's a great outlook. Mine was, it was it was terrible. And I'm going to preface this by saying that my retirement savings are in mutual funds. And I just I prefer to have someone do it because I know they're way better than me. But I do have a play account and I it was with the height of, you know, maybe it was before COVID. I can't remember. Anyway, so I bought this, this ETF that was levered three times to the price of oil. And I like this is great because oil was pretty low at the time and I was like, it's just going to keep going up. You know how we look at Oil always, always going up. And that was like, I was like a couple of months before oil went negative and it, it was gone and they shut the fund because it went negative.
00;23;35;04 - 00;23;37;07
I said a lot of good, a lot better, but.
00;23;39;09 - 00;23;53;14
I thought I was so smart, you know. And yeah, it was humbling. And this my play account has really turned into my account where I learned my worst investing lesson is it doesn't cost a lot, but I definitely learned something from that. So yeah, never again.
00;23;54;24 - 00;24;02;20
I think we've all learned those triple levered ETFs can be interesting to play with.
00;24;03;02 - 00;24;19;26
I read the bold print on the prospectus or offering memorandum. This is enough to scare most people so yeah. All right. Well, yeah, it's been excellent having you both on the show. Kevin Macan, I really appreciate it and thank you for being part of solutions to go.
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Thanks for having us.
00;24;21;03 - 00;24;28;28
Thanks for having us. Our pleasure.
00;24;28;28 - 00;24;48;11
For some of that episode of, I would say my key takeaway is really what Macan said. It's time in the markets, not timing the markets. That really ties into what I have mentioned as well about missing a couple of the best days in the markets can turn a positive or turn into a negative one. It really comes down to filtering out the noise and sticking with your overall plan. Chatting with your advisor can really help put things into perspective during volatile times. Thanks for listening to Episode one of the Solutions to Go podcast. My name is Peter Ward and have a great day. Solutions magazine is a personal finance publication featuring articles and videos on investments, insurance, banking, tax planning and health and wellness. Each episode we'll interview a different expert with a goal of entertaining and educating Canadians on a wide variety of subjects.
If you would like to know more about anything discussed on this podcast, please visit mysolutionsonline.ca