Periodic insights from our Investment and Private Client Teams on a broad range of investment and advice-related topics
Published in the Ontario Dental Association, October 2020 – by Sarah Bull, Partner & Portfolio Manager, & Philip Lieberman, Partner & Portfolio Manager at KJ Harrison Investors
The COVID-19 environment has been tough on everybody, and dentists are certainly no exception. From being effectively shut down for weeks to finally reopening — and dealing with a slew of precautions and extra costs — dentists have faced perhaps even more challenges than most independent businesspeople have. They have also had their portfolios to worry about. Markets have gone from historic highs before the pandemic to the worst sell-off we’ve seen in years, and later to a recovery that could still prove fragile. No one knows the future course of the pandemic, or of the markets; for practitioners who have recently sold their practice or who plan to do so soon, COVID may have made the prospect of living for the next 20 or 25 years off their nest egg seem daunting. Yet, from an investor’s perspective, black swan events like COVID also present opportunities — and not just buying opportunities, although there may have been some of those. More important over the long-term is the opportunity to reassess one’s financial goals and priorities in the context of potential risk, which the pandemic has reminded us of, in case we had forgotten, and with sobering effect. The fact is, few practitioners at or near retirement can afford a 40 per cent drawdown on their capital. They need to invest their capital to last a lifetime, and that means building a portfolio that can withstand black swans, as well as the many lesser shocks that can sap financial health over time. But how do you do that? The COVID environment has several lessons for investors, all of them pointing in the direction of avoiding catastrophic losses and preserving capital over time.
1. Top-down factors are as critical as picking stocks. The pandemic has shown that there is more to a sound long-term investing strategy than finding cheap stocks and watching them grow. As much as Wall Street (or Bay Street) is not Main Street, investors still need to be aware of how external shocks can hurt businesses — and stocks.
2. Diversify, diversify, diversify. Diversification, not just among equities but also across asset classes (equities, fixed income, cash and alternatives), is essential to building an all-weather portfolio, whether you’re in retirement, 10 years out from monetizing your practice or just getting started.
3. Focus on long-term goals and risk management. Managing risk requires understanding your goals and being able to tune out the noise. Unfortunately, in periods of heightened volatility, investors’ timelines often get shorter. Someone who before the crisis was comfortable with their 30-year plan may suddenly start watching the market on a day-to-day basis. But even the most dire headlines are seldom reason to abandon a long-term perspective.
4. If you don’t have a long-term plan, you need one. The ups and downs of the COVID market should remind every investor of the importance of a plan — and of sticking to it through volatility. Ask: Where am I now? Where do I want to go? If I don’t have an adequate portfolio to get me there, what other levers can I pull (for example, reducing spending) instead of taking on more risk?
5. Don’t sell in a panic. One of the most dramatic equity sell-offs in history was followed by one of the most dramatic equity rallies in history. Enough said. You cannot time the market, so you just have to stay invested — however loudly the headlines scream that the sky is falling.
6. Some exchange-traded funds (ETFs) can be problematic. ETFs have become important tools for investors looking to diversify or express a particular strategy. But not all ETFs are the same, or well understood. Some operate with a lot of leverage, and therefore a lot of risk, meaning some ETF investors might be far more vulnerable to shocks than they think they are. Which leads to the next point…
7. Understand your investments. The cautions about leveraged ETFs also apply to a few other asset classes that enjoyed a surge in popularity pre-COVID. Some investors who weren’t fully aware of the risks of high-yield bonds were shocked when their high-yield bond funds suffered 10 per cent declines; some real estate income-trust investors felt the same when COVID knocked the wind out of REITs with vulnerable holdings. In this environment — or any other, for that matter — it’s important to be informed about the risk that your investments carry. In short, understand what you own.
8. Dollar-cost averaging really can work. There’s a reason dollar-cost averaging is a popular investing strategy. Making constant dollar investments on a schedule can help you take advantage of market dips while limiting your risk if the market is overheating. It’s also a good way to tune out the noise. When full-blown panic hit in late March, it would have taken most investors a lot of courage to put their money to work. But if you’re dollar-cost averaging, you don’t need courage, because you have a plan. By making your regular weekly investment through the worst of a sell-off, you are well-positioned for a subsequent run-up. If nothing else, the COVID shock has proven that even — or especially — in the midst of the longest bull market in history, risk still exists, and investors need to manage it.
The good news is that it’s never too late to start. The lessons of the COVID shock might be hard ones, but they need not be fatal — if investors take the opportunity to learn from them and live by them.
About the Authors:
Sarah Bull is a Partner & Portfolio Manager at KJ Harrison Investors with over 25 years of experience in business and the financial industry. She specializes in managing investment portfolios for high and ultra-high net worth individuals and advising them on the complexities associated with their wealth. Sarah‘s role includes assisting individuals and families with the transition through different stages of their lives and helping them to both manage risk and secure their legacies and financial futures. She may be contacted at firstname.lastname@example.org.
Philip Lieberman, Partner & Portfolio Manager at KJ Harrison Investors, manages investment portfolios on a discretionary basis, advising high and ultra-high net worth families, including their trusts, estates and holding companies. Drawing on over 30 years of experience in investment and finance, capital markets and law, Philip takes a holistic approach, ensuring that risk is well managed to secure his clients‘ financial goals and futures. He may be contacted at email@example.com.
View the printed article here: Ontario Dentist Journal – Oct 2020
Reprinted with permission of the Ontario Dental Association and Ontario Dentist, 2020.