The American stock market is showing no signs of slowing down. US stock prices continued to climb in July, taking the S&P 500 Index to new heights. Since the beginning of the year, the return on this flagship index has been +10.52%* (until August 4, 2017).
However, these enviable returns aren’t filtering down to the statements of Canadian investors. In fact, for most people, these past few months have resulted in very light portfolio growth, and sometimes even negative returns. How is that possible? Two factors explain it: the price of the Canadian dollar, and the increase in rates.
The price of the Canadian dollar can have a significant impact on the return of a portfolio containing US stocks. Since the beginning of April 2017, the appreciation of the Canadian dollar in comparison to the US dollar was 9.26%*. Over the same period, the growth of US stocks in the S&P 500 Index was 3.51%*. Once that’s converted into Canadian funds, the investor is actually left with a loss of 5.68%*.
The recent increase in Canadian interest rates is another factor that’s continuing to undermine the performance of several portfolios. In essence, the increase took many stakeholders in the bond market by surprise, triggering a drop in the price of bonds in Canada (the price of bonds is inversely correlated to interest rates). Since the beginning of April, 2017, the FTSE TMX Canada Universe Bond Index (Canadian bonds) has dropped by 2.03%*. Since the majority of portfolios contain bonds, this drop had an effect on investors’ overall returns.
In summary, for some investors, this is a reminder that the dynamic of a portfolio is more complex than simply looking over the daily stock prices. Knowing that a balanced portfolio will be exposed to US stocks and a good part of Canadian bonds, it is very likely that the past few months have shown less than stellar returns for many investors.
It’s important to remember that your portfolio’s returns come from multiple sources, including:
Combined, these elements can sometimes have a serious short-term impact on the performance of a portfolio. However, trying to identify which of these sources will outperform the others is an exercise in futility. When a portfolio is well diversified, it will be able to deliver more consistent returns that will capture the essence of what’s happening with each of your securities (the good and the bad).
Taking a step back is possibly the best strategy you can take. If you’re still worried, don’t hesitate to talk to your advisor.
*source Thompson– August 3, 2017
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