Hello and welcome to The Download. I'm your host, Dave Richardson, and it is a summer return of our good friend, Sarah Riopelle, our building and portfolio pal. Sarah, how's your summer?

It's been great. Thanks very much. I think the highlight of my summer is that I have not actually been traveling all that much. So, sleeping in my own bed is a nice change from my normal travel schedule. You probably can't say the same.

You don't even sleep. What do you wake up at? Three in the morning or some ridiculous time like that? Because you're in the office so early, focused on managing people's money and all that because you're just so over-responsible.

Yeah, you're right. I don't sleep as much as I probably should, but that just gives me lots of time to think about ideas of things to talk to you about.

Okay. Well, that's good because it's a good time to talk. Now, we're about to become empty nesters in a week and a half, my wife and I, with both girls at school. You're in the same boat, right? Your last one's going, or are you already done?

She left a couple of years ago. My oldest just graduated from university, and my youngest is going into third year. So we've been empty nesters for a while. And maybe I shouldn't say this on a podcast, but it actually has been quite nice to have the house just to ourselves. And my daughter came home for the summer, and it has been a little bit disruptive, I must say.

Yeah. Well, we're buying mattresses and finding use furniture and stuff to furnish a couple of places. So that's what we're up to. But that's not what the listeners want to know. It's been a pretty interesting time in markets. We’re involved in markets every day, but it doesn’t mean that it’s interesting all the time. Sometimes you get a little bit more interest from people who maybe don't watch the markets as closely. So, you have another paper out. Your papers are very popular, Sarah. Where could the listeners get this? Do you post it on your LinkedIn?

Yes. On the corporate LinkedIn page, it's there. And then I also shared it on my own LinkedIn page. So people can find it either way.

Here and there, when there's a topic that's of interest from an investment perspective, you generally write a paper. I'm going to say, six or seven a year, somewhere in there?

I only want to write if I have something to say. I try to be very careful about picking the topics that I think are going to really resonate with people and then do a good job of writing on those as opposed to quick hits more regularly. I take a step back and write something a little bit more thoughtful and in-depth on a less regular basis.

There's never been a minute that I've been with you that you didn't have something to say. So that would be like a thousand papers a year?

I don't always write that stuff down. I just say it out loud, but don't want it in print sometimes.

Okay, well, this is the really important stuff to say. The paper is out, and I'd encourage you to follow Sarah on LinkedIn. I think I've talked about this before, but one of the great things that she does, she's very good with career advice for people who are looking to get into the industry. I know my daughters are big fans of the LinkedIn page, so I'd strongly encourage you to sign on to her, to follow her LinkedIn. But in the paper, you talked about the balanced approach to investing. If you go back and listen to Sarah's appearances back in 2022, we were talking about all these papers that were written about the death of the 60-40 classic balanced portfolio. This time you're talking about how that portfolio is as relevant today as it's ever been and perhaps is positioned for a really nice run. It has over the last year, but as we move forward, as well.

Yeah, that's exactly right. So the paper is titled «A new era for balanced investing» because we think that the path forward from here for the traditional balance fund — and when we say traditional balance fund, we talk about 60% stocks, 40% bonds — it's worked well over time, it's delivered stable and consistent results. In fact, it's about 8.4% annualized average return over the last 40 years for that 60-40 balance fund. So it's actually really delivered good results. As you said, we have seen some articles over the past few years saying it's not going to work anymore going forward. Usually that comes during these periods of volatility when stocks and bonds are moving in the same direction at the same time. And in 2022, that was both down at the same time. And so we never said that balanced funds would be immune to that volatility, but we do think that the case for a balanced fund remains compelling. Why is that? Well, because — and you've heard me say this many times before — diversification is one of your most important investment principles. The balanced funds provide that diversification that I think is so important for our clients. It's best achieved by combining assets that are negatively correlated with each other. What that means is that the investment returns of those asset classes are moving in different directions at different times. The best example of that is stocks and bonds. In most periods, these two asset classes are moving in opposite directions, or they are negatively correlated with each other. When stocks go up, bonds prices go down, and vice versa. In practice, though, that correlation and the degree to which those asset classes move in different directions can really vary considerably, especially over the short term. When you see these articles talking about the death of the balance fund, it's usually looking at these short-term correlation relationships and they’re saying they're broken, they're not working anymore. I feel like that's very short-sighted or very near-sighted. It's funny. Investors are rarely concerned when their stocks and bonds are positively correlated, if they're both going up at the same time. They have no problem with that. They're just worried about when they're both going down at the same time. We actually looked back at the historical performance. We looked at 26 equity bear markets back to the early 1900s, and stocks and bonds were negatively correlated or went in opposite directions 90% of the time during those equity bear markets. Bonds did exactly what they were supposed to do, and they provided that offset to equity market volatility. There were three periods where bonds and stocks both went down at the same time, so they were positively correlated. That means that that correlation, that diversification, didn't work as well as we had hoped during those periods. One of those was 2022. However, what's also important to look at is that there was still a significant benefit to owning bonds in a balanced portfolio during that period because even though they went down, they went down much less than stocks. In fact, stocks fell five times more than bonds during those three periods when they were moving in the same direction at the same time. I think understanding the dynamics of how these asset classes behave in relation to each other is really fundamental to understanding how portfolios are going to work and how to build a strong investment portfolio. A key reason why we believe that these balanced portfolios are going to remain compelling choices for investors as we go forward. One of our concerns in the past has been, can bonds continue to do that work in a balanced portfolio? Given the adjustment that we've seen since the beginning of 2022 in bond prices and bond valuations, we believe that bonds can step in and act as that ballast in a multi-asset portfolio, similar to what they've done in the past, and perhaps even more so in the coming decade. Sorry, a little bit of a rant there, but I just feel so strong about this argument.

Well, yeah. I think one of the things we talk about on this podcast with all of our guests is the importance of investors to think long term. It doesn't mean you're not paying attention to what's going on short term. Of course, we talk about things that are affecting the market in the short term while we're having discussions with different investment professionals. But ultimately, what's important is positioning yourself and putting a plan together, a financial plan and an investment plan that gets you to a particular goal or that's going to carry you through your lifetime. Most people listening to this podcast have decades of investing ahead of them, and investing doesn't stop at retirement. For some people, it doesn't even stop when you pass because you're passing assets on to future generations. I won't go too deep into that, except to say that the important number that you threw out there is over 40 years. Regardless of whether you had these small periods where they're negatively correlated and both going down or positively correlated or whatever might be happening in the short term, 8.4% average annual rate of return over a 40-year period suggests that balanced investing has worked.* Now, over this next 40-year period, we're not likely to go to a space where interest rates top out in the 15 to 20% range as they did in the early 1980s, which is part of that 40-year scan, but you’re still looking at a portfolio that works, and not only does it deliver those returns, but it does it with significantly less risk than a 100% equity portfolio. For those of us who like to sleep at night — which is not you, but most of our listeners — there's a comfort in having less volatility in your portfolio. And those bonds certainly buffer and work most of the time counter your equities in the portfolio.

Yeah, it's that steady and consistent result that you want to deliver to clients to keep them invested, keep them focused on their long-term investment plans. The average holding period of a balanced investor is around 11 years. We looked at actually the rolling return of a balanced portfolio, the 10-year rolling return of a balanced portfolio, and it has never been negative in the history that we looked at. If you're really focused on staying invested on your long-term investment horizon — because as you said, most of us are investing for years and decades, not days and weeks — then staying invested in something like a balanced portfolio is going to ensure that you can meet those return goals that you have for yourself for your retirement as an example. Getting too focused on short-term volatility is going to cause you anxiety and stress and maybe cause you to make poorly timed investment decisions.

And that's why the balance in a balanced portfolio is so useful because it helps balance your behavior and stay on course. The only question is, we expected interest rates to fall, and we've expected for quite some time for bonds to do fairly well. And of course, in the face of falling interest rates, that's generally not a bad thing for stocks either. So stocks have also done well. But bonds in particular, you've seen a real moving yield to the downside. Are we worried about bonds right now after the move, or do you have any different thoughts versus where you would have been a year ago at time around the bond market?

Sovereign bonds have actually had terrific returns since late April. And what's happened there is, inflation has reestablished that downward trajectory after a little bit of concern early in the year, economic data has moderated, and the market has been speculating about the timing and the magnitude of rate cuts as you talked about. The US 10-year yield, which is the one that we look to as an example of global bond markets, it's fallen 91 basis points, or it's fallen from 4.7% to around 3.8% over that period of time. Falling yields, as we talked about earlier, means rising bond prices. That means really good returns out of the bond market. As a result, the especially attractive valuations in bonds that existed earlier in the year and late last year, we think have normalized somewhat. And so we broadly think that yields are appropriate around these levels, sitting near the middle of the range that we're projecting over the next 12 months. So we do have growing confidence that inflation pressures will continue to subside and that there's less of a need for highly restrictive monetary policy. So we do see that Fed rate cuts are on the horizon. But that being said, there is some recent weak economic data, a little bit of concern around the slowing economies. That's what caused that volatility that we saw at the beginning of August and prompted that bid for safe haven assets and pushed those yields down further. And so it's something we have to keep an eye on. We do think that they're probably going to trade in a fairly tight range, and we think that the current level of yields is probably broadly reasonable, which is why we're sitting on a neutral position in fixed income within the portfolios. We did see the return of negative correlation. We talked about in that sell-off period in early August, where many thought that that correlation relationship was going to be gone forever. But we saw it reassert itself when stocks sold off and bonds offset that pressure. So we were happy with the fact that they fulfilled that role as that ballast in a balanced portfolio. In a weak economic environment, we could see some stronger returns from fixed income as yields fall further and that safe haven trade takes hold. But our base case is continued economic growth. And in that environment, we see that yields are broadly where they need to be at this time.

Okay, so you've been holding a neutral weight in bonds and stocks as well. And one of the things that you think is going to happen over the next little while — and I guess we've already been seeing this as we're coming through this summer — is more volatility in the stock market, which is just another reason why you want to have some bonds in portfolio to offset that volatility. And again, we just had, as you mentioned, a spectacular example of that. That you get this massive spike in volatility in the stock market, and bonds did exactly what you would have expected them to do and what you want them to do in your balanced portfolio through that environment. But why do you think stocks have started to exhibit a little bit more volatility? And this is something you expect is going to continue for a little a little bit. And again, why is that?

We always talk about the risks to the outlook and the risks to the equity market. There's always lots going on. There's always lots for us to be watching and to talk about. I do feel like there's a little bit more going on right now than maybe there has been over the past few quarters. And that's what's leading that meaningful uptick and volatility that we've seen. What are some of those examples? We had the attempted assassination of former President Trump, we had a flare up in geopolitical tensions in the Middle East, Biden's announcement to drop out of the presidential race, some weaker economic data in the US, some volatility in the Japanese market related to both the equity market as well as currencies in Japan, and some fairly hefty valuations in some areas of the market. When you have higher valuations, they're a little bit more prone to volatility because if those asset classes are priced to perfection, so to speak, then any signs of potential weakness can have an outsized impact on the prices of those stocks. The US mega-cap technology stocks are a good example of that. They actually led the market down during that period of volatility a couple of weeks ago. I would say that going forward, we still have a positive view on stocks, but we believe that the potential return over the next 12 months from stocks and bonds is fairly similar, which is why we don't really want to take a bet in the asset mix towards one asset class in particular. We're saying we think that they can both return positive returns, but they're fairly similar to each other, so why take a bet in stocks over bonds within the asset mix? We do believe that the US equity market is a little bit more vulnerable to correction because of the valuations in those US mega-cap technology stocks, but that there's lots of positive things going on in other markets around the world. Europe, Canada, the UK and emerging markets are all trading close to or more than one standard deviation below their fair values, meaning that they have fairly constructive valuation levels. And when you blend the two of those together — good value in other areas of the market, not so great value in large-cap US — and you blend those two together, and that's what has us sitting on a neutral position in the equity market. I think continued volatility with Middle East tensions and the US presidential election on the horizon will keep us watching for opportunities over the next four months.

Yeah, and what’s great is that, in a broadly diversified balanced portfolio, you've got the benefit of what's been happening with these large cap tech stocks in the US. You've had that exposure. You've had exposure through your Canadian equities and some of your other equities to the gold market, which we don't talk a lot about, but gold has had a fantastic run. So when you have that diversified portfolio, you're taking advantage of those places where you've got above average returns. But when you get a shift, you're going to have exposure in those other areas that take over as leadership. So, Sarah, it's steady as she goes right now. You're maintaining your position as we head into the fall in a neutral portfolio.

Yeah. We actually met this week and talked about the asset allocation, and we're happy to have it stay at neutral for the time being. Are we looking for opportunities to adjust that? We're always looking for opportunities to adjust that in the market. As you talked about large-cap technology in the US — or we talked about gold — we are always looking for those opportunities. I think the whole reason for investing in a diversified portfolio like a balanced fund is we will never be the best performing strategy in the market, but we will also never be the worst performing strategy in the market. Because as I said earlier, we're trying to deliver strong and consistent returns for our clients and with less volatile results, because we think that that's what's going to lead them to keep them invested in the portfolios and keep them sleeping at night. Unlike me, who doesn't sleep at night, we do want our clients to be happy with the return profile that they're seeing in their own investments so that they can sleep at night.

I'm sleeping extremely well, Sarah.

You must be invested in a balanced portfolio then.

I like to be very, very well diversified. And the new mattress is helping, too. A good mattress can help. I'm glad I'm sleeping well. Although it probably doesn't come across on the podcast, I do feel a little sharper than normal.

I'm going to actually think it's more that you're properly diversified in your investment strategy. That’s what is helping you sleep at night. It's more about that and less about the mattress.

Sarah, hopefully, we'll sleep through the fall and winter with your help. And thanks for a great summer. And thanks for your visit today. And the paper, too. The paper is great.

Thanks for having me.