Changing With The Times


By Paul Gleeson, BBS, QFA, CFP

This article also appears in the Celtic Connection, November 2011.

A recent trip back home to Ireland has given me much renewed hope for our special little country. Yes things are still very tough economically. We do have huge challenges ahead of us as the upcoming budget in December will be another difficult one for the Irish people.

However from my meetings and conversations, I definitely felt that not only is there a sense of getting on with the job of recovering, but also that the economic slap in the face Ireland received in recent times has resulted in a very positive change in the manner of the Irish people which for me is even more important.

A great visual example of this occurred one day when I was in Dublin. I was walking down Fitzwilliam Street, one of the old Georgian Streets in Dublin where many legal, accounting and financial firms are situated. Dublin City has successfully introduced a bike rental system where you can rent a bicycle from different street locations, cycle around on it for however long you want and drop it off at another street location where you simply lock the bicycle up for the next customer to use.

As I walked down Fitzwilliam Street, I saw four men on these bicycles in suits and ties. It looked like they were using these to get from one meeting to another. This picture would not have been seen 5 years ago in the midst of the Celtic Tiger. For me this illustrated two things: firstly, the fact that somebody (in this case Dublin City Council) has seen an opportunity in the midst of challenging economic times and launched this service, and second, the fact that business people are adapting to the times and “tightening their belts” where needed.

I thought this was a very apt analogy for what we as investors in general need to do on a continual basis, not just now but over the coming years ahead:

Opportunities in the midst of challenging economic times

We certainly are living in “interesting times” and from a financial and investment perspective these are also very worrying times for many people. It does take a certain amount of courage to make investments in these challenging markets but opportunities have been created in volatile markets like those we are experiencing right now.

For example in early 2009, we saw the price of publicly traded REITs (Real Estate Investment Trusts) take an absolute hammering and this presented an excellent real estate investment opportunity. As a firm, we started investing in certain Canadian REITs in March 2009 and this strategy has resulted in a total return since then of 152% up to the end of September of this year. I mention this not to boast about this result, but more to highlight that there are always opportunities during volatile investment markets.

Adapting our investment portfolios where appropriate

I have written before about the “sideways trading market” I believe we have been in since 2000, meaning that market movement has done little to improve investment returns. The Dow Jones Industrial Average in the U.S. is a good example of this (see chart below). The Dow opened at 11,497 on Jan 1 2000. As of Oct 26, 2011 it stands at 11,869 – i.e. had you stayed invested in the Dow Jones for the past 11 years relying only on price appreciation, this rollercoaster market would have done nothing for you.

Throughout history, we have seen these types of markets before and the average length of these sideways trading markets has been about 17 years. I do think these volatile markets will remain with us for another 5 years or more before we enter a sustained bull market. Therefore adapting to the current climate (like our cyclists above) is essential if we are to preserve and grow our capital over these challenging years.

For me and my clients, this means having a good level of diversification across many assets classes aside from stocks and bonds. It also means designing portfolios that produce cash flow to stabilize returns during this sideways trading market. Having been in this type of market for a number of years now, client portfolios have been adapted this way for some time.

Another way we have adapted more recently for these volatile times is the investment in what we call “alternative strategies”, including gold, precious metals, other commodities, hedge funds and private equity opportunities. We believe these types of non-correlated investments (meaning investments that move a bit differently than the stock market) will deliver absolute returns for our clients in this type of environment.

There is no “one way” to invest money and ultimately investment returns speak for themselves. But just like how Ireland as a country is adapting to these challenging times, so must we as investors, adapt our strategies to meet the challenges that the current volatile investment markets present.