November 2022 Strategy Notes

It has undoubtedly been a tough year in the markets. Every once in a while when the markets run too hot, we experience a correction. Such corrections are generally considered a normal event and also a sign of a  healthy market, since it will shake out the companies whose stock prices have soared far too high relative to their underlying fundamentals.

When markets are good, investors tend to be more aggressive. Many investors piled into the latest and greatest, including high-flying tech stocks or meme stocks. Over the course of the year so far, many have experience significant price drops and remain very far off from their previous highs. What speculative investors often fail to grasp is the trade-off between risk vs. reward.

At Aloni Goh Wealth Management, we believe the risk vs. reward tradeoff is an inviolable rule when it comes to investing. There cannot be a potential for high returns while taking low risk. This is basic, but it is something we constantly educate our clients about. Returns should be viewed not only in absolute terms but in terms of percentage above the risk-free rate. For example, 20% may be a great return when the risk-free rate is 2%, but it isn’t that great when the risk-free rate is 18% (as in the ’80s).

It is more important to assess what the client’s risk profile is, rather than their expectations on the potential returns.

In the fixed income portion of our bond portfolios, we keep our maturities short in a rising interest rate environment. While the Fed has hinted at the potential slowdown of rate hikes, they have also made it clear that we’re not out of the woods just yet. By ensuring our bonds mature in the short term, we can reduce time risk and also capture the upside of higher rates when new bonds are issued. It also presents opportunities to buy bonds below par, and we intend to hold them until maturity to lock in capital gains, which are also taxed more efficiently. With the rate of Canadian treasury bills — ie. the risk-free rate — hovering around 3.75-4% and 1-year GIC’s at around 5%, the fixed income portion of our portfolios are yielding well over 6%.

Our stock portfolio consists mostly of bigger, more reputable names that have shown decades of more predictable, steady growth. They are not exciting names, but once again, taking into consideration the risk vs. reward tradeoff, they have proven to provide good returns in the long run. When planning for retirement, a big purchase or future investment goals, taking on too much risk could negatively impact an investor’s ability to reach those goals.

Our steadier approach leads to less worry during times of significant market volatility, so that you may enjoy more time with those you care about, especially with the upcoming holiday season — just like Ron’s dog, Eli, and his good friend, Jasper.