Market Update – Summer 2013

Market Update – Summer 2013                                     July 12, 2013

Robert Luft, CFP®, CIM

Portfolio Manager

Director, Private Client Group

Luft Financial,DundeeWealth – DWM Securities Inc.

(604) 739-8575  rluft@dundeewealth.com

 

The US federal reserve’s chairman, Ben Bernanke, has caused both upside and downside volatility with his recent comments on if and when the bank will proceed with tapering its’ stimulus efforts.

His phrase “a highly accommodative policy” gave some relief to investors trying to digest the Fed’s next moves.

Questions still loom, however, about the long term effects of the removal of this stimulus.

How high will bond yields inevitably rise?  In a rising interest rate environment, which asset classes will outperform?

From a portfolio management standpoint it is my opinion that there has never been a more important time to be diversified.

While it is often the case that interest sensitive investments such as bonds, preferred shares, REITS, and utilities will fall in value as interest rates rise, the effect of holding these assets in a balanced portfolio significantly reduces volatility providing those assets are imperfectly correlated (ie: they don’t rise and fall at the same time in value). In other words, one asset “zigs” while the other asset “zags”.

(see Diversification:  A bigger free Lunch:  Campbell/Harvard http://kuznets.fas.harvard.edu/~campbell/papers/diversification.pdf)

To this end we remain balanced between equity and income producing assets, with a small amount of cash (under 5%) in our asset allocation targets.

We have reduced exposure toCanadaand increased our targeted holdings of US and International equities.

Given uncertainty over the Canadian housing market and its’ effects on Canadian household spending and GDP growth going forward, I believe better opportunities exist outside our borders.

While ongoing policy of theUSgovernment will continue to create market volatility, by following a diversified strategy I feel we can capture most of the upside potential for growth over the long term, while limiting our portfolio volatility in the short term.