Some days ago I gave you a handful of rules for investing. One of them was never exit an asset class.
This is what kamikaze, suicidal DIYers do all the time. They surf. They read pumper and doomer websites. They take extreme advice. Then they load up on gold because the banks are failing. Or trash Canadian assets because we’re screwed. Or shun preferreds and bonds because yields are puny. Or sell off their REITs because the dinglenuts who ran Target flamed out and retail’s now dead.
This is also why people buy stuff that goes up and shed things that decline. The same holds true for bank stocks as it does for houses in Burnaby. Most people are victimized by their emotions, and lately that has run to fear.
Big mistake. Things are great. At least for those with balanced and diversified portfolios as opposed to, say, McMansions in suburban Calgary.
This week proves again why you can never, ever afford not to own a whole bunch of stuff at the same time. Weeks ago as oil shunted lower and stock markets bled, bonds blossomed. Yields fell and prices rose. Investors with 20% of their portfolio in various bonds (government, corporate, high yield) saw their fixed income rise, mitigating any decline on the equity side. (That’s exactly the plan – it’s what ‘balance’ means. An equilibrium between safe stuff and growth assets.)
Lately, this has all changed. Oil has gained back ten bucks in four sessions – about a fifth of its value. Toronto stocks – unloved and abandoned puppies in January – have been on a tear. Despite the poodles at the Bank of Canada, negative growth and lousy job creation, investors owning an exchange-traded fund like XIU (which holds the biggest 60 companies on the Toronto market) are happy. The TSX is ahead 3.5% so far this year (six weeks) and the gain for the last 12 months is 15.1%.
In the US, the dynamo continues. The greenback has come down on eased tensions over Greece, car sales in January were a home run, the federal deficit as a percentage of the economy has plunged, the unemployment rate is half what it was six years ago, consumer confidence is at an 11-year high and 2.95 million jobs were pumped out in the last twelve months. And while the middle class is still suffering mightily from its failed real estate obsession, the economy is powering ahead. The S&P is flat for 2015 and up 19.8% over the last year.
Now, oil could fall again. Likely will. The Bank of Canada dingdongs may drop their interest rate a second time. And there’s no stopping a mess of layoffs or lower house prices in Alberta (Edmonton listings are now up by almost 30%, and sales are fading). Bond yields could drop and prices rise. Bank shares could come under pressure, just as easily as regain the 15% they’ve fallen this year.
Real estate investment trusts – good ones, held inside an ETF like XRE – have blossomed even as failing stores and punted employees grabbed headlines. That fund has added almost 8% in the past month alone, and gifted investors a distribution yield of 4.73%. Compare that to your GIC.
As bond yields have fallen and prices swollen, investors have also been nibbling away at preferred shares – those hybrid beauties sitting between stocks and bonds. Way more stable than common stock, plus they pay you in tax-reduced dividends instead of interest (as bonds do). Buy them in the big, blue chip companies like the banks or insurers and hang on for a great yield. For example, the fund XPF has traded in a narrow range over the past year and kicks out a dividend yield of 4.96%.
Here’s the point: you have no idea where markets or commodities are headed. You have no idea what oil will cost in a year, or what the Fed will do with interest rates. We can surmise, guess, gamble and wish, but is that really the way to invest?
Of course not. Leave the hormonal urges and emotional baggage to the moist virgins who crave debt and stainless. Those who are serious about building liquid net worth (the best kind) are well served by having a portfolio weighted to 40% safe stuff (half a variety of bonds, half preferreds) and 60% growth (about 8% REITs, the rest in equity – a third of it Canadian, the rest US and international, divided between large and smaller cap companies).
As I said above, establish the correct weightings, don’t sweat over trying to time markets (or you’ll be paralyzed), shun individual stocks and mutual funds, never exit an asset class and rebalance this thing at least once a year. Also move stuff around so that more-taxed assets are in a tax shelter, and the tax-efficient part is not. If this is too much trouble to manage, hire a dude to do it. You can write it off.
Try that with your realtor.