Most of the time, we believe a portion of your portfolio should be invested in equities. Numerous studies show that equities should provide the highest return in the long run. However, there are times when it simply makes sense to reduce the risk in a portfolio, because of changes in the markets, or the economy, which make the risk/reward of equities unfavourable.


Anyone who has heard us speak about our investment approach understands that we believe a portion of every portfolio should be in equities when we have a “green” signal…and we want to be completely out of equities when we have a “red” signal.


Markets became more volatile in August – something we saw reflected in our client portfolios through the fall. Our research indicators recently moved to the “yellow” (neutral) zone. This alone doesn’t mean we should get out of equities; but it does tell us that more caution is warranted. We have no way of knowing whether the next market move will be back into the green zone or down into the red. After much discussion, we decided to make two major changes to our portfolio models.


  • First, on November 12 we sold all of the individual stocks that were part of our models in all client portfolios and moved the equity allocation to low volatility ETFs (exchange traded funds). This change in investments should still allow the portfolios to rise if the economy and the markets improve, but should also provide greater downside protection if conditions worsen and we fall into the red zone. Given the indicators we were seeing, this seemed like a more prudent way to get exposure to equity markets.


  • Second, we decided to overweight US equities and the US dollar. Our relative strength indicators pointed to this move as did common sense. There is a good chance the US Federal Reserve will raise rates in the US, and higher interest rates will likely attract money flow into US dollars. Additionally, our new Liberal government in Canada has committed to deficit spending over the next few years, which may make Canada look less attractive to outside investors.


We take the management of your investments seriously and are constantly looking to improve. On that November morning, we sold about $30 million worth of individual stocks. Foremost in our minds was protecting your capital when the outlook was uncertain and our indicators were neutral at best.


The effort also confirmed the capability of our discretionary team. We sold over 2,400 individual positions across almost 400 accounts. The smoothly-executed bulk sale meant that every client account was repositioned without a hitch – illustrating the nimble, proactive money management approach we espouse. We could only have quarterbacked these coordinated transactions on a discretionary platform.


Markets have been challenging this year, but we are doing our best to mitigate the risk to your capital, and we are very pleased to witness the continued success of our strategy. We especially look forward to watching how the strategy performs in a more “normal” year when the major indices are up!