Martin Pelletier: This is one mistake that I promised myself I would not make again regardless of what segment of the market it is in
Traders work on the trading floor at the New York Stock Exchange in Manhattan. Photo by Andrew Kelly/Reuters files Someone once told me the past is like a wake behind the boat: it doesn’t propel the boat forward, but is what’s left behind by our actions made in each present moment.
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Of course, many of us reframe our memories, the so-called wake, as a way of justifying the decisions we made that got us to where we are currently.
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This makes it next to impossible to prevent the same mistakes from being repeated, because we keep thinking the past has complete control over our lives and the decisions we make. It comes down to either poor me or blaming someone else when we should be asking what to do about it. This happens all the time in life, including when investing.
We’re all now looking at the carnage caused over the past nine months, a time when stocks and bonds have gone down together in a magnitude that hasn’t happened since the 1930s.
Average investors and professional money managers alike are reframing their memories to say this was unforeseeable even though there were plenty of warnings about the potential for rapidly rising interest rates. As a result, they’re refusing to manage their duration exposure in both stocks and bonds.
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Making matters worse, the only two segments that went up were energy, which the majority of investors were and still are massively underweight, and the United States dollar, which has been a global wrecking ball in those regions, such as the Europe, Australasia and Middle East, unable to keep pace with the U.S. Federal Reserve.
Taking it a step further, central banks are doing the exact same thing by making excuses for their actions that got them in the mess they’re in today. They were slow to raise rates to temper the surge in spending following the lockdowns and now they risk overreacting by hiking rates too fast, too high in a desperate attempt to catch up.
The Fed is also under tremendous pressure from the Joe Biden administration to reduce inflation ahead of U.S. midterms, which we think could be clouding their judgment.
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Instead of trying to make up for what happened in the past, why not try to take a step back, realize mistakes were made, identify where you went wrong, don’t be held hostage by it and move on? Leave the past in the past and focus on doing the right thing in the present.
One problem here is something called career risk in the investment adviser community, which is the probability of a negative outcome on one’s career due to action or inaction, so there is tremendous safety in not deviating from the herd.
For example, making long-duration bets in segments such as technology really paid off for advisers over the past decade, and attracted a lot of new clients. This worked great until this year when the Nasdaq and specialty tech funds sold off anywhere from 20 to 60 per cent.
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Recommended from Editorial It’s time for investors to stop complaining and spending so much, save some money and put it to work Encouraging signs for investors lie ahead despite all the doom and gloom It’s a scary time for investors, but they need to find the courage to face their fears Not surprisingly, many advisers are doubling down by buying these segments again and framing current prices to recent highs, but few are asking what happens if interest rates stay near current levels and what the impact would be in such an event.
This current situation reminds me a lot of the post-2000 tech crash when former Fed chair Alan Greenspan raised rates. World-leading companies such as Cisco Systems Inc. were still great companies, but they became terrible stocks to own as it took 20 years to recoup the losses made in only one year.
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Article content Commodities were severely underinvested in at the time, yet it was the start of a huge boom in energy, resulting in the S&P/TSX composite index outperforming the S&P 500 for the next decade.
That said, the same thing eventually happened to the energy sector. The peak supply argument lost steam and U.S. shale and horizontal multi-stage fracking resulted in the U.S. becoming an energy powerhouse once again — something so many of us, including myself, never saw coming.
This is one mistake that I promised myself I would not make again regardless of what segment of the market it is in.
Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc, operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning.
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