Investing is the way to secure your financial future. Learn about how investment diversification bolsters your portfolio.
In a world of financial uncertainty and rapid market changes, long-term investing success can be achieved by focusing on the areas and strategies that are within your control. You've undoubtedly heard that investing is an excellent way to build wealth, but there's more to investing than simple tricks like "buy low, sell high".
This episode dives into a compelling conversation with Michael Keaveney, Vice President of Managed Solutions at CIBC, as he describes the key habits of successful investors including investment diversification, investing regularly and staying disciplined amid market volatility.
Both novice and seasoned investors can leverage the insights and strategies discussed in this episode to enhance their portfolio and effectively manage their financial future.
CIBC Asset Management insights hub: Preparing your portfolio for market volatility
CIBC Smart Advice hub: Three tips to make your regular investments work harder
CIBC Investor’s Edge poll: Many Canadians’ financial strategies overlook investing
[01:17] Carissa: “Everyone has a different investment goal, different appetite when it comes to volatility and duration in the market.”
[05:50] Michael: “Markets are not linear in the return path that they generate for you. A lot of your overall return comes from a relatively small number of really good periods. And we don't know exactly when those best times will come.”
[08:42] Michael: “Diversification reduces volatility due to less than perfect correlation between asset classes.”
[18:21] Michael: “There's always going to be something in the portfolio that is the laggard. That's the whole point.”
[23:20] Michael: “Fear is not conducive to long-term success.”
Michael Keaveney is the Vice President of Managed Solutions at CIBC. With a strong background in investment management, Michael leads the development and oversight of CIBC’s managed investment solutions. He is known for his expertise in portfolio management, investment strategies, and client-focused financial planning.
Michael has played a pivotal role in evolving CIBC's balanced portfolio offerings, including increasing foreign exposure and alternative investments. His work with Morningstar also gave him powerful insights into the investment behaviour of several demographics. His approach emphasizes investment diversification, disciplined investing, and helping clients navigate market volatility with confidence.
Connect with Michael Keaveney on LinkedIn
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Carissa: Welcome to Smart Advice, a podcast connecting you with real financial advice, investment strategies and economic trends, empowering you with insights you need to make smart decisions about your money. I'm CIBC’s financial advice expert, Carissa Lucreziano.
There's optimism for investors on the horizon. After two years of inflationary pressures, rising interest rates and an underperforming stock market, it looks like economic recovery will continue to support periods of catch up performance in the market in 2024. Our CIBC economics team is cautiously optimistic about the economy's resilience and its effect on equities and fixed-income market performance.
Investing with a diversified approach is one of the most effective ways to maximize future wealth. But it does involve taking on risk of volatility, weathering the ups and downs of the market. We are constantly inundated with information from news headlines, social media — not to mention friends and family — on what is the best approach and where to invest your money today.
It can be hard to cut through all that noise and feel confident about your long-term investment strategy. On top of that, everyone has a different investment goal, different appetite when it comes to volatility and duration in the market. Today, we're going to discuss a few key habits anyone can adopt to become a disciplined investor and grow your wealth by sticking to a long-term plan, even during turbulent times.
Joining me for today's discussion is Michael Keaveney, Vice President Managed Solutions at CIBC Asset Management. Michael is a veteran in the investing and portfolio management world with extensive experience, including nearly a decade as head of Investment Management Canada for Morningstar Investment Management Group. Michael is here today to help teach us a few lessons on the habits of successful investors.
Michael, thanks so much for joining us today.
Michael: Thank you very much, Carissa. It's great to be here.
Carissa: It's great to have you. So you know, Michael, on this podcast, we often talk about all of the factors that influence current market conditions like inflation, interest rates, the value of the Canadian dollar economic policy, just to mention a few. Of course, individual investors cannot control these larger forces, but they can control how they manage their own portfolio.
When it comes to investing, what should people focus on beyond the current market environment? I know it's tough. But where should they focus on?
Michael: Well, it is a great question. And like many other things in life, it is focusing on what you can control and not on what you don't. So the first thing I would say is that investors should really focus first and foremost on their goals. And people will have multiple goals with multiple timelines. Some goals have a range of outcomes that could be considered successful in a range of outcomes. Some you might need an exact dollar amount.
So you need to understand what those are, what the differences are, I think people need to focus on realistic expectations. They have to understand that certain markets have periods of downturn, markets have likely ranges of return over time. So that is an expectation-forming exercise that I think everybody should focus on.
I also do think that they should focus on their own education. In your wonderful introduction, Carissa, you did talk about the current market environment and things like that. I know that that is talked about on this podcast. I would not advocate that people ignore that entirely. But part of the education is to begin to realize that a lot of talk about the current market environment, whatever that might be, does not provide a lot of nuance in a very complex world.
So for example, right now, we have the Bank of Canada and the US Fed at different stages of entering into a rate-cutting cycle. The Bank of Canada has had two cuts in June and July of this year, and the US has not yet entered into implementing a rate cut cycle. So there's some concern over how much the Bank of Canada could deviate from the Fed and what the effects on the Canadian dollar might be.
And that's fair, you might get some support for that from some theoretical models. But a long-term comparative look at our central bank rates show that changes in rate differentials are much noisier than changes in currency movements. And there are periods historically where we've had significant differences in interest rates without corresponding changes in exchange rates.
So the point of educating yourself is not to turn yourself into an economic historian, but only to help you learn that the point is there are always multiple factors in play. And simple theories often miss the complexity of markets.
Carissa: Yeah. And also like, how that affects you as an investor — as a Canadian. So what are the things that you really should be paying attention to? Because to your point, there is a lot out there.
So how should investors shift their mindset to focus on that bigger picture? What are some really great practices that they can implement when thinking about investing for the long term or an investment strategy as a whole?
Michael: Well, one of the things I've tried to say a lot is to acknowledge the short-term downturns are a feature and not a bug of equity markets. And with the bond market downturn a couple of years ago, I've expanded that comment to include all of the markets. So yes, we, the mindset changes to understand that volatility is a feature of the market. That's a preparation message.
And knowing, I think, is half the battle. Even if you don't know exactly when downturns will occur, it's helpful to know that they will occur jumping in and out of the market sounds great in theory, but it really is not a realistic strategy for success. Missing out on the best days in the markets, the best days, the best months, the best years — it's a problem.
Markets are not linear in the return path that they generate for you. A lot of your overall return comes from a relatively small number of really good periods. And we don't know exactly when those best times will come, whether that's the best day, month or year, but we do know a little bit about it.
Those best times come probably right after the worst times. And when you've got a jumping in and out strategy in the market, you tend to jump out after the worst time has occurred. It has scared you out, that means you have probably suffered through the worst time. Now you're on the sidelines and not getting the benefit of the best time, which is imminently around the corner.
So that mindset shift of understanding that these things will happen is really very, very important and not jumping in and out.
Carissa: Yeah, I think we all do it to some degree or maybe have in our investing lifetime. And I know there's many that sit on the sidelines, either waiting or to your point scarred from experience. Many look at current pockets of volatility. They look at the short-term, the past year's market trend to try to anticipate what's going to happen in that short term, like usually six to 12 months.
But it's interesting how perspectives can change. When you look at the equity and fixed income market performance from the vantage point — you mentioned this before — of your financial goals or how long you will be investing your money.
Michael: Right.
Carissa: So financial advisors and portfolio managers, they talk a lot about the virtue of taking a balanced approach to investing, and Michael, you talked about this a lot. And you have in many of the videos that you've recorded; diversifying your investment portfolio with a mix of cash, equities and fixed income.
This approach, as we know, can create great value in the short term and over a long period of time for investors, as well as help manage volatility. How has the balanced portfolio approach evolved over the course of your career? And that balanced portfolio investment strategy really could be for anyone? Of course, depending on their goals and income needs.
Michael: Yeah, there's a lot of stuff in those questions there Carissa. And I guess I'll answer them all in turn. I do want to focus on those diversifying benefits, because that hasn't changed. That's been a long-standing feature of the balanced equity market.
So diversifying has been called the only free lunch that you get in investing. If your portfolio is made up of those cash bonds and equity components that you talked about, then your overall return is going to be an average of the returns to those positions basically, in the proportion that you hold them.
But the volatility of your portfolio is going to be less than the volatility of those asset classes in the proportion you hold them. Because their return paths are not perfectly correlated — when one zigs the other might zag or at least they don't move in lockstep. So diversification reduces volatility due to less than perfect correlation between asset classes. And that's kind of the mathematical answer and benefit of a balanced approach.
But for a balanced portfolio, there is something else going on, which I think is behavioural, rather than mathematical. We know there can be a difference between the returns that an investment vehicle delivers, and the returns that the underlying investor receives.
Morningstar, the company that I used to work for, has been examining that difference in the returns of those investment vehicles for many years. And the measure of what they call the behaviour gap is the difference between the time-weighted or the investment returns and the money-weighted, which is the investor returns of retail investment products over time.
Now, their most recent published study covered a ten year period up until the end of 2022. It's US data and categories, but we think the same is true all over the world over long periods. When looking at overall results in broad categories, two patterns are very clear.
First of all, across categories, investors on average underperform the investment vehicles they choose. Now that study has been repeated several times. While the numbers change from year to year, the direction doesn't. Investors on mass underperform their investments. But most important for this conversation, that gap is narrower for balanced funds and a balanced approach versus other categories.
Now, Morningstar pointed to a link between more negative investor gaps and more volatile categories. And that's fair enough. But balanced funds also fared better than less volatile fixed-income categories.
So what is it about balanced funds? Balanced funds are actually investing in the same asset classes as those other categories. We think a lot of the explanation resides in the fact that the balanced wrapper shields an investor from noticing individual asset classes that have underperformed over short periods, and therefore they're more likely to stay invested in the whole package solution.
So diversified balanced funds are a very effective tool in supporting positive investor behaviour and narrowing that investor gap or that behaviour gap. Now, that's been true of balanced funds all along.
But part of your question was also: how has it changed? When I started my career in the mid to late 1990s, balanced funds were most commonly built for accumulation-oriented investors, and most often constructed with limited foreign exposure in order to meet the guidelines of the time for pension guidelines and RRSP rules at the time.
The funds tend to be made up of individual stock and bond positions. And they were simple enough that a single manager or maybe a co-manager structure where one person was the equity person, and another person was the bond person, that was all that was needed. Now, we still have a lot of those types of funds today, and they can still meet a lot of balanced objectives.
But we have also had the rise of what I'll call more sophisticated strategies, where certainly the foreign exposure might be higher for both stocks and bonds, and there will be more granular sub-asset class exposure. Now even the inclusion of diversifying alternative investment strategies, up to and including now private credit, and private equity. Though in many cases, that has meant more specialized management expertise at that sub-asset class level, and the fund of funds structure.
We've also seen the rise of ETFs that can in some cases allow for cost effective exposure to either broad asset classes, or very convenient, quick exposure to themes and factors where traditional active managers aren't available. So with all of these building blocks now available and an aging population, we've actually seen a rise in income-oriented investing via balanced funds, too.
So when you look at the balanced funds category in the retail investment space, you have a lot of funds with a balance label, trying to achieve quite different outcomes in different ways. And that's great news for investors.
But it does actually become more important than ever to look beyond the label in these categories. And see what is inside the tin. I think the final part of your question, Carissa, was: how can this meet everybody's needs? I do think balanced solutions can cover a lot of ground.
In the Canadian retail space, for example, the multiple product categories that contain various balanced funds range from around 20% equity exposure at the lower end of that fixed income balance category, all the way up to 90% equity exposure at the upper end of the equity balance category. These are all categories very popular with investors. So the appeal is very broad. And what the right balance is, is in the eye of the beholder, and the individual investor.
Hopefully with the benefit of receiving sound advice. So depending on the underlying construction of those portfolios, of which the equity mix is part of some balanced solutions are best suited to investors still in their accumulation stage, but others work best as regular distribution generators, delivering at least part of that in higher income generation from the underlying investments. So I would say in general, balanced solutions are very broadly suitable for a wide swath of investors.
Generally, though, with reasonably long time horizons and at least a low to medium or a medium tolerance for risk. So yes, it's a pretty broad group that can benefit from a balanced approach.
Carissa: I’m really glad you said that because there's a lot of clients especially those in the accumulation phase that to your point may not need specific amount of funds to fund retirement or income needs, etc., that are still looking for growth, they're still looking to have a component of growth within their portfolio or to create or have the opportunity to create above inflationary return.
So this is great that you've said that you know, I love, diversification is one of the only free lunches, a balanced fund is like a wrapper. Your depiction of diversification is, on the upfront part of your answer, is exactly, in most cases, what investors need to truly understand about diversification.
You've talked a little bit about it, but from your experience in investment management, take us behind the scenes. Take us inside the mechanisms of how the management of this type of portfolio works. You touched a little bit about it in the past, and now kind of future. But I think that's what a lot of investors need to understand is how is this actually behind the scenes? How does this work?
Michael: Sure, I think when you're behind the scenes, there's a lot of talk and conversation when running these portfolios, because they are inherently complex. There's many different asset classes, and somebody who's leading that, because there's always somebody in charge and the ultimate decision maker, but it's generally done by a lot of people.
So there has to be a lot of formal and informal conversations about these asset classes that have to go on. And one of the things that has always struck me about being a balanced investor is that when you have a very broad remit, where you can go to a bunch of different asset classes and sub-asset classes, maybe even into that alternative space.
You're going to have a lot of great ideas available to you, maybe even pitched to you by specialists who are more expert in that narrow area than you are. So there really is a skill and an art to fitting those ideas into the portfolio in a very coherent way. If you're going to diversify, you have to understand how those ideas are different from each other.
That's kind of the whole point of that balanced investing. You don't want a hundred different iterations of the same idea, because that isn't diversification. So you really have to have a very good portfolio construction, understanding about how these things fit together.
They can be great ideas in and of themselves, but you can put them together in poor ways, if you are not skilled in that art of portfolio construction and asset allocation. So a lot of conversation with asset class experts is very necessary. Now, of course, when it comes to the, you know, the blocking and tackling of day-to-day balanced portfolio management, there's lots of figuring out how to best implement changes.
Do you do that through direct buying and selling of the underlying securities? Do you let the cash flows of the portfolio do the work, inflows and outflows do a lot of that heavy lifting for you? Do you implement your changes in some sort of overlay strategy as well?
All of those different change and implementation ideas, there are places for them in various types of balanced portfolios and depending on the size and flows to the portfolio, different ones work better. The main thing behind the scenes, I suppose, is that when you are a balanced investor, inherently in the portfolio, there's going to be multiple viewpoints up to and including contradictory viewpoints.
You might have one part of the balanced approach where somebody is bullish on a certain market and another part of the portfolio where it's a bearish call on that very same market. And you do have to learn to reconcile those opinions, because what you are doing is working towards an overall client goal.
One of the things that a balanced manager always has to learn to do in the background is say they're sorry for things that don't work out, because they are. It is a diversified portfolio, and there's always going to be something in the portfolio that is the laggard, that's the whole point.
They don't all do well, it’s all a piece of it, it won’t all do well at the same time. They don't all do poorly, necessarily at the same time, either. But there's always going to be a laggard. And you always have to be able to reconcile when things aren't going well at a part of the portfolio, because the overall objectives of the portfolio are still being met.
Carissa: Yeah, it's like a whole bunch of gears working together. But to your point, the balanced type of portfolio, not everything is working in tandem, but that's also a big piece of the benefit of a balanced portfolio. So thank you for that.
A recent poll from CIBC Investor's Edge finds that only 48% of Canadians say they're investing their money regularly on an annual basis. Investing frequently and consistently has huge impacts on building future wealth over time, and it can be the difference of thousands of dollars.
Michael, let's look at a straightforward investment growth calculation. Let's say you put away $300 every month over a 40-year time period. If you earn a 5% rate of return net of fees over that time, you'd accumulate nearly $450,000. In this example, the initial contributions add up to only 145,000 over that period.
The rest is compound growth. It's quite easy to run these numbers yourself. Your financial institution will have tools for this. I use the CIBC investment growth calculator. This is an important strategy to look at from an investor perspective.
Regular investing can take on many forms, like the one I just mentioned, where it's smaller amounts monthly over a long period of time, or, for example, someone sells an investment property and wants to invest the proceeds over a shorter period of time, let's say 12 to 24 months to take advantage of different price points in the market. They also call this dollar cost averaging.
Michael, why are only 48% of Canadians investing regularly?
Michael: According to that survey, Carissa, the big responses were lack of knowledge and fear of losing money. And those are very understandable sentiments. But it's too bad. Because you articulated very well, the superb benefits that one gets from having a regular investment program.
When we think about it, you know, a major financial goal for most people is to finance a comfortable retirement. That really means taking, let's say, a 40-year income stream in the form of employment earnings or business earnings or what have you, covering again, let's say 60 years of spending during their working years, and then a period afterwards of retirement.
So really, you're financing a much longer period of life through your income stream. That's where regular investing comes in quite clearly, because there's a mismatch there. Our lives last longer than our employment-earning lives for most people.
Those earnings aren't all given to us on the day one, when we start our career, right, they come in the form of a plate paycheck, or whatever. It's very tempting in the moment to spend all your money, and then try to figure out what you have leftover at the end of the year. And guess what happens: life got in the way, and nothing's left over.
But if you can pre-commit to a regular investing plan, realizing that you have to finance a lifetime, that's much longer than your working lifetime. And that's just for one goal, right? That's the retirement goal. But it works for so many other things as well. So yeah, I can't stress enough the benefits of regular investing. And I think your mathematical kind of example there really does put it in perspective.
Carissa: Yeah, absolutely. When it comes to keeping an investment plan on track and looking to make the most out of investing. What should investors keep top of mind, always?
Michael: I think long-term investing success, really, is the topic of what we're talking about today. Come from a focus on the areas you control, and not on the areas you don't control. So your goals, your objectives, your willingness to take risks are all variables more in your control than the ups and downs of international markets. But you refer to yourself at the beginning as well.
And I should get it across — aside from the complexity of markets, there is a whole world out there that seems to be devoted to urging you to act on fear and move you to the short term and act in the moment.
Fear is not conducive to long-term success. So although it's not easy, I think this is also something investors have control over avoiding the lure of short-term considerations, and focusing on your long-term goals, which is really the thing you must keep top of mind.
Carissa: Wonderful. And then related, but maybe a little bit of a different perspective, with the years of experience you have in this industry, your expertise. What are the biggest lessons you have learned towards becoming a successful investor?
Michael: Well, I think it comes down to having identifiable traits, right. You know, there are characteristics of successful investors that work clearly through time. And not just the most famous investors, but you know, regular investors in general, having those clear goals from the start, what are you working towards, really does dictate the suitable investments. So I think that that's number one.
I think that smart and successful investors also learn from mistakes, there is no such thing as an investor over time, who does not make mistakes, but you can learn from your own mistakes. And you can also learn from those of others, although I think the ones you learn yourself are more hard-won, and maybe stick a little better, but learning from mistakes, wherever you find them is important.
Then understanding that you're not going to bat a thousand. You're not always going to be successful over the short periods. But successful investors are really measured over long-term periods. I think there's an inherent discipline that has to happen for somebody to be successful. How much am I going to invest? When and where am I going to change my mind? What would cause me to revisit my investment goals. That kind of discipline is important.
I think that successful investors are also curious. They want to understand what drives markets over the long term. The complexity of markets in the short term is probably not a fruitful place for curiosity. But long term, I think the curious investors will start to understand what drives markets long term.
I believe at the beginning of your comments you were talking about the economists who were, ‘cautiously optimistic’ was, I think, the term used. I actually think that a certain amount of optimism is a trait of the most successful investor, when you are investing, you're investing for a period in the future. And you have to have a belief set that the future is going to have some sort of positive outcome.
So I think while pessimists and so-called realists can sound smart in the short term, it's the optimists who win over the long term. I also think that you have to understand as a successful investor, the probabilistic nature of outcomes, you know, we don't operate in a Rube Goldberg machine as investors where you press a lever or roll a ball at one end, at an exact clear outcome comes out at the other, there are always a range of possible outcomes with any approach that you take.
Folks who understand that there's a certain probabilistic degree to the outcomes will end up being more successful than others who require a very clear and unfettered outcome. And that I think that people do need to be on a related note, comfortable with volatility along the way, there are certainly safe investments out there.
But the most successful investors, I think, are comfortable with a certain degree of volatility along the way, and they learn to make that part of their process. And then finally, I think that successful investors are not afraid to be different from the market, sometimes a little bit contrarian.
When you think of, you know, a very simple adage of investing of buy low, sell high, for example, that is easy to think about. But in practice, when you are buying low, it tends to be when markets have low sentiment, and when you're selling high, it tends to be when they have a high sentiment, and in the moment, you would have to think a little bit differently than the rest of the market to implement that successfully.
So there are a number of traits out there. I'm sure of a number of other traits that I haven't mentioned. But there's a short list of what I think separates successful investors from the others.
Carissa: There were so many great golden nuggets in your short list. A few things that stood out to me is discipline, comfort with volatility. And what I absolutely loved is, you know, remember, you are investing for a period of time in the future.
Michael, I could continue to talk about this topic all day, you have shared some incredible insights. Thank you so much for being with us today and just really taking us into the world of not only balanced investing but really thinking about it from an investor perspective. And really, you know, considering how we approach this in our everyday lives to build wealth for the future. So thank you. Thank you. Thank you.
Michael: Thank you very much for that. Carissa. It was my pleasure and privilege to be here today.
Carissa: It's important to remember that as an investor, markets will react to events and economic conditions that are out of our control. While you can't predict the future, you can prepare for it by being disciplined, diversified, and continuing to invest regularly. Thank you for tuning in to this episode of Smart Advice. I'm Carissa Lucreziano.
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