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Welcome to Advisor To Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject matter experts themselves.  

Michael Keaveney, vice-president, managed solutions, CIBC Asset Management.  

The Bank of Canada is among a handful of major central banks that have started to cut interest rates, and currently, signs point to the U.S. Federal Reserve joining the fray in an upcoming meeting.  

The headwind to growth posed by central banks is declining, and broad financial conditions appear to be reasonably balanced. For fixed-income markets, falling central bank policy rates are helpful for bond prices, and the same can be said to varying degrees for different parts of the equity markets.  

For government bonds and developed markets specifically, our expectation is that current yields will trend narrowly around a range and are fairly reflective of long-term equilibrium, and therefore their returns in the next year will be dominated by the interest income they generate.  

Of course, a central bank policy rate is only one of many factors that can impact markets, and the policy rate itself is a single response tool to a variety of moving parts and changing sentiments.  

Market participants also make a great deal of trying to predict exactly how far central banks will move in any direction. Our current base case belief is that inflation has remained stickier than expected, which could end up meaning that central banks will ease policy by less than expected.  

There are other plausible alternative scenarios to the base case as well. A second wave of inflation remains at least a possibility, as does a global slowdown. These aren’t our base cases but could be potential outcomes of central banks’ future policy stances, either being too loose or too restrictive, respectively. So, it’s important to point out that, while we have a view that more central banks are on or about to be on a rate-cutting path, and that could be a net positive for markets, there are consequences to the banks cutting too little or too much, and there are many other potential factors that can drive markets. 

We think political risks could pose a more important challenge to markets and investor sentiment than economic data or central bank activity. Volatility related to political events has already risen in several markets around the world. For example, unexpected election results this year caused spikes in market volatility in India and South Africa and price declines in France and Mexico. We expect U.S. elections in November to be especially relevant. U.S. elections are often associated with positive equity returns and higher market volatility, but starting valuations of U.S. equity markets this time around might make the levels of gains we’ve seen recently there much harder to generate going forward.  

Political risks aren’t just about elections, though. We also see China’s relations with the U.S. and Europe as an ongoing risk to monitor. Now, in general, market volatility isn’t overly elevated currently, but we expect it to rise as we move through the end of the year.  

These risks likely won’t be resolved in a completely clean manner or by an exact date. There could also be risks that arise that aren’t currently factored in by the market. Witness the surprise global equity sell off in early August of the unwinding of the Japanese Yen carry trade, which caught most investors by surprise.  

The best mitigation to these types of uncertainties, which are ever present, from an investment standpoint, is prudent portfolio diversification, likely in the form of some sort of balanced portfolio. From a behavioural standpoint, which could be more important to the individual investor, gaining knowledge and real-world experience that short-term risk is a standard feature of being an investor — that’s a powerful mitigator to crystallizing bad outcomes in the short term. And another risk mitigation strategy is emphasizing focus on the things investors can control, such as making a regular investment plan for their long-term goals.  

Regular investment strategy is extremely valuable for virtually all investors. For most people, when we look at our important investment goals, which could be financing a prosperous retirement or funding a child’s education, there’s a future commitment and there may not be enough assets there today to pay for it. Because it’s a commitment way off in the future, it’s tempting to put off the effort to make the savings. After all, there’s no shortage of competition in the present for spending our income. But the future commitment or liability, if you will, is there regardless. If it’s an important and big goal, like retirement, then it needs to be financed in more bite-sized chunks while we are earning an income. In other words, most of us have an earnings lifetime which is shorter than our overall lifetime.  

The regular investment strategy matches up our earnings stream to our long-term goals, but it’s more than that as well. First of all, let’s note that we’re calling it an investment strategy, not just a contribution strategy. And there is a difference. It’s not just putting the cash aside, though that is important. It’s also putting it to work right away in the investments that have been determined to be suitable to the goal over the time horizon. That probably means taking on some appropriate investment risk in the short term, but it puts aside a temptation to make hard-to-get-right timing decisions. It takes the complexity of the markets, which is outside our control, and pre-commits to a schedule of investing, which is within our control. If all an investor has done is put aside cash, then there is still the decision to be made about when to invest it, and it seems like the markets are always giving us reasons to hold off investing in the short term, while long-term results have always tended to support the idea of making the investment when we have the opportunity.  

Those with a regular investment strategy also have the advantage of making investments at times when the markets are down. It’s a built-in buy low strategy at times. They also learn, through their experience of investing regularly, to be less fearful of short-term volatility and come to see volatility as more of an opportunity than a challenge. So, having a regular investment strategy breaks down big goals into more manageable chunks, and is an action that makes the good habits of buying low, navigating volatility and staying invested easier and within the control of the investor.  

According to a CIBC commissioned survey, respondents who had not implemented a regular investment plan cited lack of knowledge and fear of losing money most commonly as barriers. These are valid concerns, and they sound very much like the types of barriers people might put up for themselves before starting out on any good habit, maybe something like starting an exercise program. They don’t necessarily know how to do it, and they don’t know how to be successful or are afraid of failing. So, they are in need of some sound guidance to get started, and that guidance could be to focus more on understanding fundamental investment principles, as opposed to every last detail of the markets and starting small. This is where sound advice can come in. In my view, one of the primary ways advisors demonstrate their value is to act as behavioural coaches to their clients. Given the complexity and uncertainty of investment markets and our very widespread human tendencies to bounce between emotional extremes of being overly optimistic and being fearful, there’s a strong value for advisors in helping investors focus on the things they control and away from the things they don’t. Helping clients understand that volatility and uncertain outcomes are standard features of investing is the educational component of that. That’s an ongoing task, and the lesson needs periodic reminders, even during the good times. And advisors do that. Implementing a regular investment program connects clients to their goals and takes away a lot of the potential for indecision and poor timing.  

So, it’s a valuable tool in an investor’s toolkit to reinforce with something controllable, the principle that time in the market, as opposed to timing the market, is most helpful for long-term success.