June 10, 2009, 5:36 am

A Meeting With a Portfolio Manager

by: The Financial Blogger    Category: Investment, Market and Risk
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Last Monday, I was wondering if I should borrow money and invest in the market after I took my profit and that the stock markets surged 30%+ from the past 3 months. Well life is designed a curious way that you may get the answer when you ask them out loud! As a financial planner, I have the chance of meeting several financial specialists from tax expert, accountant to economists. But my favourite meeting; is always with portfolio managers. I love the hear about their global perspective and to see the rationale behind their thinking.

Unfortunately, these people are human too and only 3 portfolio managers out of 10 will beat their reference index. Nonetheless, I still give credibility to the guy who was in front of me since his investment company continuously beat the market over a 3, 5, 10 years period of investment. So they may not be right every year, but globally, they are doing just fine!

He was part of the people who think it is not done yet

While I couldn’t say he was pessimist, he clearly stated that the market rally we are living is not based on solid assumption. Most people simply speculate on the fact that the worst of the global crisis is behind us. He also had the very same opinion about the oil price that is climbing near $70 a barrel.

He was explaining that US consumers are simply not able to start spending like crazy as they used too. Therefore, the economic boost that everybody prays for may not come from the US. In fact, he was saying that by exporting most of their manufacturing to the Eastern countries, they didn’t control their inflation correctly. Their economy was booming and inflation should have increased and create equilibrium, the fact that they were now paying a cheaper price for their goods! (due to exporting). So they all thought that they were geniuses as economy was growing and inflation was steady. However, they were also exporting a lot of job that they don’t have anymore. This could hurt their economy badly.

He also showed us the 10 years yield on the S&P 500 as of April 30th 2009 (you can’t blame me to give you outdated numbers ;-D ). And I am not sure you want to know the result…. MINUS (-) 4.4%. Invest long term my financial advisor says… hahaha!

As I mentioned before on this blog, this happened about 4-5 times since the Great Depression. On the other side, he brought a very interesting point: people who think that bonds will do better than stocks in the upcoming year since they show a positive return over the past 10 years are wrong.

He mentioned that the rate will be kept at a very low level as economy is not going to burst tomorrow. Therefore, bonds will probably bring a net of fee yield of 3 to 4% while the stock markets should bring 6.5%. The chances of seeing the stock markets underperform for another 10 years is less likely to happen the portfolio manager says. However, while the current market is trading at 12 times the profit, he doubts we will be back to the 16 times the profit trading level before the crisis.

So I think I will not borrow more money and simply keep investing through my RRSP with my liquidity for now. I’ll let the summer go and enjoy my vacation!

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Precise forecasting and market timing is difficult as we can see from the average advisor’s results. That’s why I prefer to look at a range of possible outcomes based on obvious price pressures. For example, right now the S&P 500 is close to it’s long-term trend based on some well-reasoned estimates I’ve seen, so I would expect something around the long-term average return from it. If it goes back to 1500 this year it will certainly be a much less attractive inestment and I would have lower expectations for it. (it’s too bad there isn’t more research based on the TSX)

As the point about bonds shows, things that have done well are likely to do worse and things that have done badly are likely to do better, so we may be fortunate to be at one of the few times when the stock market has had a negative 10-year return! I’m pretty happy that I didn’t invest much before learning this.

I really have no clue what will end up happening, but as long as I can make an educated guess about the range of possible outcomes I might be able to move myself a little closer to the right allocation to take advantage of it. If the S&P is just at an average level that would be a good reason not to go out of your way to make extra investments.

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