Posts Tagged ‘rebalancing’
Investing: ‘What ifs’ and ‘maybes’ lose out to long-term planning
Back in August 2011, I posted Don’t Panic. 
I took a look at investor psychology in the face of negative sentiment on the markets. In It was the best of times (for dividend investors), I outlined how well dividend-payers did over the last few years. The markets have done very well for the dividend-centric.
So what’s an investor to do, now?
Interesting U.S. market stats
Bob Pisani, of CNBC, points out some interesting information regrading U.S. markets:
Most notable among the trends was a near-record pace of fund flows last week into equity funds.
Stock mutuals saw $19 billion come in, the highest since 2008 and the fourth-biggest in the 12-year history of tracking the data, according to Bank of America Merrill Lynch.
The latest American Association of Individual Investors survey registered a 46.4 percent bullish reading during the same period, well above historical averages, while those expecting the market to be lower in six months fell to 26.9 percent.
Finally, the CBOE Volatility Index, or VIX, a popular measure of market fear, is at a subdued sub-14. A declining VIX usually means rising stock prices.
(Read More: Why VIX’s Recent Plunge May Be Bad for Stocks)
About the only areas showing caution were safe-haven money market funds, which saw assets grow to $2.72 trillion on an influx from institutions, and commodities, which had outflows of $570 million.
The most popular reason among traders for all the optimism is basic relief that the U.S. made it through the “fiscal cliff” scare relatively unscathed.
If that’s the case, the looming debt-ceiling battle and a likely lackluster earnings period could offer perilous counterweights.
So, what’s an investor to do?
The reality is, if you know who you are as an investor, and more importantly, where you want to be, none of this should rattle you. But it should make you think. Trading the media is something some do, and some do it very successfully, but most don’t. And that’s why investors must plan.
When planning for a year, plant corn. When planning for a decade, plant trees. When planning for life, train and educate people.
— Chinese proverb
Warren Buffett plans. Why not you? After all, planning is a form of self-reflection and self-education.
The metric of the past and planning for the future
It may be wise for investors to reassess their investing plans, to decide if their plan is capable of meeting their goals and then have the courage to sail on the course they’ve charted. If past is prologue, then the last couple of years have rewarded the longer-term planners for wading through the ‘what ifs’ and ‘maybes’ and sticking to the fundamentals.
The market hasn’t had a 10 per cent correction in a while in the U.S. While we all watch, we have to wonder at the market’s resilience while remembering why we hold assets that act as ‘insurance’ against revaluations. Any correction should be incorporated into your plan and taken advantage of. But a 2 or 3 per cent drop from an all-time high is hardly a correction. Having some cash on hand when markets have hit recent highs is rarely a bad idea.
The market hasn’t seen a traditional correction in almost three years. Majority sentiment would have seemed against this phenomenon three years ago. We will have a correction at some point. No one can be sure of the degree of the next correction. But does this alter your planning?
Planning empowers you in the face of ‘peril’
It’s best if you incorporate the possibility of a correction into your plan. Because, at some point, the stock markets will correct.
In a world gone into overdrive, where the short-term seems like the long-term to some, authentic long-term planning may be the most valuable commodity.
The markets are like anything else with respect to planning. And the markets are one of the best barometers of human psychology. ‘Perilous counterweights’ need to be part of your planning.
We’ve all heard that in the long-term risk gets reduced by time-in-the-market. In the meantime, knowing your tolerance for risk is crucial. What we can learn from the period from August 2011 to now is that risk happens in so-called ‘safe’ investments, too.
The broad markets have outperformed cash. At some point, markets will correct. Maybe that process has started. Markets correct. This is part of what makes a bull market healthy. And corrections are the reason why we should use proper asset allocation in our portfolios.
One thing is sure. It was better to be in-the-market than it was to be in cash in the time period we looked at above.
No one owns the patent on the future. No one ever knows the exact nature of the next correction. It’ll be interesting to see what the next six months holds …
A plan we can live with is part of what keeps people happy as investors over the long-term. So that we can sleep and dream of sheep.
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Stocks, bonds and what? People need to learn more about investing
Financial literacy or a pair of shoes?
Last year I blogged about financial literacy in Canada.
Statistics about kids and adults are a little worrying when it comes to financial literacy. From new data, Americans aren’t much different. Studies show people need to do a lot more to become financially knowledgeable.
Juggling the egg
I recently overheard this: “What’s in your portfolio?”
Blank stare, and then: “I own XYZ.” (One of the biggest stocks in the U.S.)
That’s it. XYZ. Nothing else.
But wait! XYZ’s done great! It should go up forever or even longer.
Hmmmm … The thing is:
Those are the two “it’s different this time” ideas that have humbled investors since stock markets were born. Short-term thinking … People forget that the XYZ’s of this world have been a long interchange of different companies throughout investing history.
Do you really want one egg dictating your financial future?
Investing without diversification is potential financial suicide. (Or at least financial Russian roulette.)
Momentum is a marvelous thing when it’s on your side. But your worst enemy when the tide changes.
Ask former RIM, Palm, Nortel, Enron, Lehman Brothers investors.
If this had been your only stock, how would you have felt? What would have happened to your portfolio?
Know what you know:
Find out what you don’t know
According to the Investor Education Foundation of the Financial Industry Regulatory Authority’s study in the U.S.:
- 67 per cent rated their financial knowledge as “high”
but,
- Only 53 per cent answered this question correctly:
True or false: Buying a single company’s stock usually provides a safer return than a stock mutual fund.
I doubt that most of these respondents were momentum traders trading single stocks. It’s more likely that the majority had no idea that this is one of the most important rules of wealth creation: Diversification.
- Only 6% got the above question wrong, choosing “True.”
But,
- 40% said they didn’t know the answer, and 1% declined to answer
Ouch.
Maybe it was just an anomaly.
Let’s try again:
If interest rates rise, what will typically happen to bond prices?
Rise? Fall? Stay the same?
No relationship?
- Just 28 per cent answered correctly
Yes, they will usually fall.
- 37 per cent didn’t know
- 18 per cent said bond prices would rise if interest rates rise
- 10 per cent said there’s no relationship between bond prices and interest rates
- 5 per cent said bond prices would stay the same
- 2 per cent said they preferred not to answer
Becoming a statistic can have long-term complications
Looking at these stats shows there’s a lot of financial illiteracy out there.
It’s a crime that financial literacy is not taught in high schools.
— Michael Finke, professor of personal financial planning at Texas Tech University/co-developer of the Financial Literacy Assessment Test, part of Ohio State University’s Consumer Finance Monthly survey.
(In Canada, things are changing.)
Can teachers help?
When asked about six personal financial planning concepts:
- Fewer than 20 per cent of teachers and teachers-in-training said they felt “very competent” to teach those topics
- Teachers felt least competent about saving and investing
— 2009 survey of 1,200 K-12 teachers/prospective teachers National Endowment for Financial Education
What do you do if teachers don’t feel competent to teach financial literacy skills?
Governments …
- Need to focus on helping teachers get these skills
or
- Need to bring in outside help to assist in improving financial literacy skills
Agencies are doing their part in both the U.S. and Canada to raise awareness around financial literacy. They can’t do it alone:
- Parents need to teach their kids about debt
But parents need to understand the dangers they’re trying to warn their kids about.
The consequences to our economy and economic future of financial illiteracy are immense. Championing long-lasting positive changes for kids (and adults) is important.
Those shoes were made for walking (but they could really cost you)
Study after study has shown that adults will spend more time focusing on buying a pair of shoes (or other purchase) than they will on their financial future.
Is this the legacy we want to leave our kids?
Find out more about diversification:
You don’t need to listen to Warren Buffett (if you’ve allocated your investment portfolio properly)
A simple way to arrive at the right asset allocation for your portfolio
Plan like a pension fund manager when it comes to your investment portfolio
Asset allocation: Diversification is king
Related articles
- Americans don’t understand investing basics (marketwatch.com)
- Kids need financial literacy, too, many say (dispatch.com)
- U.S. high schoolers get another F in financial literacy, new study shows (oregonlive.com)
Is it better to have invested, and lost, than never to have invested at all?
Well … 
It certainly helps you achieve your investment goals if you own investments that have a chance of getting you to your destination.
Take a look at the following charts and ask yourself two questions:
- If you had bought during the major dips, would it have benefited you?
and
- How would you have done with your money in low interest instruments according to the charts below? *
Example fund vs. 1-year GIC
Example fund vs. 5-year GIC
It’s clear that the most conservative investments wouldn’t have served you as well since the inception of this fund. What investors would do well to remember is that GICs lock your money in until maturity while mutual funds, ETFs and stocks are more liquid, generally.
Not to mention:
- If you had bought during the dips
and
- If you had rebalanced regularly
… you’d have done better than the chart shows since you would have lowered your cost or ACB and generally bought lower and sold higher.
So …
Do you have a plan, a strategy?
What is it?
Remember a few weeks ago when the news about Europe was so bad that optimism seemed naive?
I’m paraphrasing myself from a previous post. I talked about learning to harness your fear. There are always reasons you can find for Armageddon if you look hard enough.
People want stability. At times, markets and the business cycle are anything but stable. Above, you can see that during the worst stock market correction in most of our lives, an example of a balanced, dividend-based portfolio outperforming the most conservative of investments, GICs, by four times or more.
When the doom and the gloom gets really thick, many investors feel paralyzed. But that’s exactly when great investors look for opportunity.
During the doom and gloom, markets often decide to have a good bounce.
Isn’t that counter-intuitive?
Actually, it’s pretty normal. If there were no walls of worry to climb, there’d be no bull markets. In “Wait a minute. There’s some good news re the markets?” I blogged about how investors often miss the opportunity in the end-of-the-world-as-we-know-it scenarios.
I posted some stark stats in “Why you should consider new investments now”.
Since we’re supposed to be strategic about long-term investing, let’s ask ourselves a question again:
When the market takes a substantial dip, is there more chance that it’ll rise or keep falling on average?
In “Don’t Panic”, I also talked about managing fear while investing. Learning to harness your fear is important in sports. Imagine you’re taking a penalty. It isn’t easy to stand there and score in front of 70,000 people.
Why should it be any different when you invest?
What’s the market going to do?
No one knows. There are a lot of educated guesses, research, charting, but no one knows.
Accept it.
Just as, if you decide to start a business or enter into any kind of relationship, there’s no 100 per cent satisfaction guarantee.
Business, economic news, the process of investing, continues to flow. It’s a river. There are rapids. There are waterfalls.
There may even be a couple of Niagaras out there.
But if you look at history, you’ll see that there were always those who pushed and went further. For every time you encounter end-of-the-world-scenarios, you’re going to see that someone steps up, looks at the recent correction in the market and says:
Hey, there may be some value here.
Accept the psychology of the market. But get a plan.
Is the bad news over?
Here’s what I said in that previous post:
We’ve come through a tough time. We’re not out of the woods yet, but if you’ve been sticking to a sound investing plan, you’ve taken advantage of the weakness in the market.
The bad news about being an inactive investor in 2011
If you had been sitting in cash only:
- You missed a very nice rise in the bond markets
and
- A great opportunity to reallocate investments to stocks
You might have taken advantage of a great time to buy equities at lower prices and participated in the rise of the bond markets.
Or, you might have asked the more unlucky question:
What happens if the world ends?
It might be better to ask:
What happens if I think strategically about my investments?
What happens if the world doesn’t end?
Want more information?
Click here for more about bonds and fixed income investments.
Click below for more about asset allocation and reallocation strategies:
A simple way to arrive at the right asset allocation for your portfolio
Plan like a pension fund manager when it comes to your investment portfolio
Asset allocation: Diversification is king
Click here for articles about dividends/dividend-payers.
* Example fund chosen out of large bank balanced funds with a dividend bias. Fund used purely for illustrative purposes with a time period of less than ten years since the effect of the financial crisis should have been greater during this period.
Chart source: Globeinvestor.com
A question every investor should ask: What happens if the world doesn’t end?
Learn to harness your fear
Remember a few months ago when the economic news was so bad that optimism seemed naive?
Well …
Markets the world over made solid gains in January.
Have a look at this recent article. Negative investor sentiment is occurring at the same time as the best January in the markets since 1987.
The markets often climb significant walls of worry. Sometimes, it pays to focus on bad investor sentiment and use it as a contrarian indicator.
In “Wait a minute. There’s some good news re the markets?” I blogged about how investors often miss the good news flying below the radar.
Many people have been burned by the excesses of credit mania, culminating in the market implosion of the financial crisis.
Humans in all walks of life sometimes give in to greed. Exuberance and fear are flip sides of a coin forged at the beginning of time.
I posted some stark stats in “Why you should consider new investments now”.
Why post negative stats? Because, while end-of-the-world scenarios might sell bytes of information in the short-term, they don’t do much for the average investor who’s trying to be strategic about long-term investing.
The starkness of information can be helpful.
Ask yourself a simple question:
When the market takes a substantial dip, generally, is there more chance that it’ll rise or keep falling on average?
Bad news gets the big, black ink (or bytes)
There are always going to be onslaughts of bad news. Good news rarely gets the big, black ink of the headlines until the story’s over. In between, you need to manage your fear.
You need to think strategically.
In “Don’t Panic”, I went into greater detail about managing fear while investing. Learning to harness your fear as an investor will go a long way toward helping you create an intelligent plan of action when it comes to investing and financial planning.
Again, in “The grand parade of future dividends “, I discussed how corporations were increasing dividends (good news for investors) and ended with the question:
“What happens if the world doesn’t end?”
While Canada is experiencing higher unemployment, the U.S., recently written-off as a basket case, just posted strong employment numbers.
What people keep forgetting, is that business, economic news, and the process of investing is fluid. Some get so used to bad news that they forget good news exists.
Until January, there wasn’t a big focus on the positive. But whispers of good news were there if you read between the lines (or read more than just the headlines).
Now, was it really a good idea to sit on the sidelines as an investor during all that bad news? And is the bad news over?
Well, here’s the thing:
We’ve come through a tough time. We’re not out of the woods yet, but if you’ve been sticking to a sound investing plan, you’ve taken advantage of the weakness in the market.
The bad news about being an inactive investor in 2011
If you’ve been sitting in cash only:
- You’ve missed a very nice rise in the bond markets
and
- A great opportunity to reallocate investments to stocks
Risk applies to low-paying GICs just as much as it does to equities or real estate.
In this case, low-paying GICs weren’t much of a safe haven when compared to the Altamira Income Fund, or even the broad Globe Fixed Income Peer Index.
Sitting in GICs can cost you.
So, when you consider the past year would’ve been:
- A great time to buy equities at lower prices
and
- That bond funds significantly outperformed the GIC index *
… it pays to ask this question again:
What happens if the world doesn’t end?
The case for bonds against ...
... GICs. (Over five years)
Click here for more about bonds and fixed income investments.
Click below for more about asset allocation and reallocation strategies:
A simple way to arrive at the right asset allocation for your portfolio
Plan like a pension fund manager when it comes to your investment portfolio
Asset allocation: Diversification is king
* Many criticize bond funds for their higher fees as compared to ETFs, but for many average investors they are the easiest way to get a diversified bond portfolio since not every investor has a trading account.
* You should also note that since bonds have significantly outperformed, they may not perform as well over the next few years. A balanced portfolio is the best way to ensure consistent outperformance while minimizing risk.
Note: Fund/funds used here are only for illustrative purposes.
Chart source: Globe Investor
Part Three — Market volatility: Why and how to make it work for you
In Part Two, I left off discussing benchmarks on investment returns.
Easy as ACB revisited
I stressed that such benchmarks only reveal how your investment would have done if you invested all of your funds at the beginning of the period. These benchmarks assume you were inactive during the time period you’re measuring, and you did zero rebalancing during 2008-2009 or other significant market corrections — exactly the periods of time when you should be (or should have been) more active.
While investors should have been rebalancing during 2009, research shows average investors freeze up during these times, or worse, sell.
The worst case scenario is that they sell heavily.
Let’s say you had a large cash position in your portfolio near the bottom in 2008-2009. New cash, profits you’d taken, whatever …
Now, let’s say you used that cash and bought equities around that time, which turned out to be the bottom or near the bottom of the correction. Your return would be considerably different. And this is why rebalancing is so important to the success of your investments, portfolio and retirement plan.
If you’d been following a sound rebalancing strategy, you would have bought during the downturn in 2008-2009 because your asset allocation would have drifted away from your plan.
Let’s use a simple illustration:
• You bought 50 shares (or units of a mutual fund ) at an average cost of $7
• Then you bought 10 shares at $5 (you were brave and when the market dropped 50 per cent in panic selling, you saw opportunity)
• You then continued to deploy your cash while the market was cheap and bought 10 shares at $6 (because of your rebalancing strategy, which you follow automatically. You bought while prices were cheap because your asset allocation had changed.)
• The market rose dramatically after this period and your asset allocation reached your target. You stopped buying.
So, your adjusted cost is:
50 @ 7= 350
10 @ 5 = 50
10 @ 6 = 60
Your total cost was $460. The price now is $7.
7 x 70 = $490
You now have profit of $30, called a capital gain.
In reality, your transactions will be more complicated, and there will be dividend payments in there somewhere. But the simplicity of this example shows us how following asset allocation strategies with your investments will help you lower your Average Cost Base (ACB).
Your equity component would have been, percentage-wise, less than it had been. Your allocation plan would have kicked in, and you would have bought the underperforming equity investments.
Even if you did this more gradually, before, during, and after the correction, it would have lowered your average cost.
One way for Joe and Josephine Average to get a leg up is to take advantage of what’s available to them. Tax-preferred or (deferred) investments and plans, and sound portfolio strategies included.
But research shows they don’t. Volatility spooks them, and sadly, this will cost the average investor over the long-term.
When I was a kid …
An older colleague I used to work with said the following, loosely paraphrased, about his lack of savings and investments in his youth: “When I was a kid, I was convinced I wouldn’t make it to forty.”
Heavy pause.
“I was wrong …”
I had asked him why he didn’t have an RRSP because I wanted to understand how he thought. He later added that he had lost a ton of money in real estate (Canadians seem to have forgotten the real estate crash that happened in 1989-1990 – Americans have had a harsh reminder).
Looking at real estate in this context reinforces my point of view on buying assets when they’re low. While it took residential real estate a long time to recover from ’89-’90, today’s real estate prices (supported by an extended period of low interest rates) prove that buying assets when they’re cheap is rewarding.
Yet nobody wanted residential real estate in ’89-’90, and many developers lost their livelihoods during that time.
Raising awareness, being startegic
Raising awareness about the investing habits of Joe and Josephine Average will help them over the long-term. They need to better educate themselves about market volatility and be more strategic in their approach to it.
While this is easier said than done, it is one of the reasons the Warren Buffetts do better than the Joe and Josephines when it comes to investing and financial planning.
Market volatility, understood properly, is your friend. Reminding yourself of this completely reframes the way you look at the market, your investments and corrections.
Maybe your friend goes a little berserk once in a while. Maybe he’s a little impatient or a little irrational at times, but he’s still your friend.
You know you can count on him when you’re down. Looking at market events this way, despite difficult times, puts you in control.
Just make sure the relationship is a long, diversified one.
Part Two — Market volatility: Why and how to make it work for you
In Part One, I discussed some differences between the 1 per cent and 99.
How do the 1 per cent differ from the 99 when it comes to market volatility? Is there something the average investor can learn?
I’m not trying to defend the 1 per cent. What I am trying to do is point out that the market is public and that market volatility leaves no one untouched. No stone unturned. 
I’m not here to talk about tax inequality or to defend either side. People like Warren Buffett have done that. There have been arguments for and arguments against Buffett.
What I’d like to focus on is:
While the 1 per cent have better intelligence and more powerful networks when it comes to investing, there are strategies the 99 can use to get ahead. Strategies Warren Buffett and the 1 per cent have been using for a long time.
If you’re a long-term investor, you can own a lot of the same assets. Granted, you may not get these assets at the same transaction costs due to scale, but you can own assets that should enrich you over time.
Have the wealthiest people sold all of their assets? Doubtful.
Do they sell them after market declines?
Well, let’s look at this rationally.
- You need to find a buyer in order to sell your shares (the sheer scale of owning billions in assets means it’s harder to find a buyer when you sell)1
- Liquidating such assets might cause some significant tax implications2
- Because of professional counsel, the 1 per cent are exposed to more and better research than average investors, leading to fewer knee-jerk reactions in the face of market events
There would be barriers to the 1 per cent selling their assets.
Taxes …
You can see at least three articles above discussing whether taxes on investments and the 1 per cent are too low. There is definitely a movement afoot to examine these issues.
Let’s set the 1 per cent aside for a minute.
Remember, Joe Average gets a break on taxation for certain investments, too. So does his partner, Josephine. They may not get as big a break, but they do get a break.
They get a deduction for contributing to an RRSP. They get tax-free earnings in a TFSA. If they’re invested in dividend-paying equities outside of an RRSP or TFSA, they get tax-preferred income from those dividends.
Advice
Because the wealthy have the means to get good counsel when it comes to their investments and financial planning strategies, we can assume that those professionals counsel their clients:
- To avoid panic selling
- To rebalance regularly and systematically
- To take advantage of market volatility through rebalancing strategies
Joe and Joe and Market Volatility
Now, what about Josephine and Joe Average? Are they taking advantage of the better prices presented through market volatility?
After the 2008-2009 correction, did the average investor take advantage of some of the cheapest prices we’ve seen in a generation? Is the average investor taking advantage of cheaper prices now?
Research says no. (Like to explore this idea further? I blogged about it in “Don’t Panic”.)
People concentrate on returns over a given period of time. But such assessments assume that you invested your money all at one time at the beginning of the period. How many investors do that?
Easy as ACB
Your Adjusted Cost Base (ACB), basically, how much you paid as you bought an investment, is a much more realistic measurement of how you’re doing.
If the broad market’s down 20 per cent, and you’re ACB is showing that your investment in a broad-based mutual fund or ETF has broken even, e.g. the investment’s price is 10 and your ACB is 10, you’ve done great.
Why? Because you’ve outperformed the market over the same period.
How did you accomplish this? By using excellent rebalancing strategies.
Of course, if you’ve had a more conservative position, you have to realize that when the market turns around, the broad index may start outperforming with respect to your investment. Your rebalancing plan will help with this, and sticking to that plan will help even more.
Figuring out who you are as an investor is important.
In Part Three, I’ll continue, focusing more on long-term strategy with a simple illustration of why that focus will make you a better investor.
Notes:
1The 1 per cent tend to buy shares of companies more than they buy mutual funds. Diversification isn’t as big a deal for them. They have the means to buy enough shares and still be adequately diversified. This isn’t true of the average investor. Some market experts say you should have at least a million dollars to invest to be adequately diversified when holding stocks. Others disagree. It’s true that the fewer companies you hold, the less diversified you are, and the more risk you’re taking on. Employees that held most of their investments in Enron or Nortel found this out the hard way when the stocks collapsed3.
2Taxation is another reason why the 1 per cent sell their holdings, e.g., experts have suggested Steve Jobs’ heirs sell their shares in Apple to avoid over $800 million in tax liabilities.
3More evidence for diversification comes by way of Bill Gates example. While he has significant wealth in Microsoft shares, he holds a lot of Berkshire Hathaway in order to further diversify his holdings. Forbes claims that more than half of Gates wealth is held outside Microsoft stock.
Wait a minute. There’s some good news re the markets?
It’s all bad news, right? 
Nope. Surprise, surprise. And it’s on the upside.
Pour this latest data into your glass and see if it looks half-full.
Panic and pessimism may usher in a market rise (It’s happened before. It’ll happen again.)
Contrarians love all the bad news. To them, it means we’re closer to good news as they wait for the point of maximum pessimism. But maybe we’ve already hit that point?
- Inventory levels in the U.S. are low.
- Stocks look cheap. Compare U.S. equities to U.S. bond yields. Dividends look great and promise more than bonds currently.
- In the U.S., the fall in housing prices and low financing costs have created the most affordable housing climate in decades.
When could “mean” be green?
All things revert to a mean, don’t they? Usually, when someone says it’s different this time, it’s exactly the same as last time.
- Bonds have beat the pants off stocks over the past 10 years. The last time equities were performing like this was the 1970s. Since this is true, bonds have become overvalued relative to stocks.
- It’d be an understatement to mention that investors are increasingly risk averse. Panic is prevalent — especially in the news. In the face of this: Corporations continue to show financial strength and profitability. U.S. dividend payments continue to rise paying investors to wait.
- The market went through the roof last week at an agreement to agree to agree in Europe. Looks like a ton of pent-up demand. The will for the markets to go higher is there. But investors who weren’t already in the markets had little chance to get in. Things just moved way too fast. Sitting on the sidelines may leave the average investor sitting on the sidelines.
What will be the impetus for markets to rise?
If governments stimulate again, we could see a big push in equity markets. There’s value in the markets. Stick to your plan.
Filter out the noise. Focus on the facts. Find the candles burning in the doom and gloom.
How many times have you heard someone say: I wish I’d bought shares in XYZ Corp.? Isn’t it funny that when companies are at big discounts, only the few and the brave want to go shopping?
When it comes to the markets, it’s often looked darkest before the dawn. But the facts above may be the lantern to help light your way.
Updates:
Prem Watsa of Fairfax Financial sees value in the market in the guise of RIM and doubles stake
Frank Mersch of Front Street Capital says stock market’s showing value and is cheap
Follow @JohnRondina
Why you should consider new investments now
Thinking about contributing to an RRSP, a TFSA, an RESP or other investment account? Now may be one of the best times since 2009 to fund any of these accounts, especially if you have over ten years for your investment to bear fruit.
Why?
Because, at the time of writing:
- In Canada, the S&P/TSX Composite is down 20 per cent over six months
- In the U.S., the S&P 500 is down about 17 per cent
- Any good news out of Europe causes some nice upward movement on Canadian and U.S. equity prices, suggesting there may be some upward momentum if Europe gets its act together regarding a solution to the debt crisis
- As the two most common areas for Canadian investors to put their money to work, Canada and the U.S. present compelling values for stock investors compared to six months ago
- The S&P/TSX Composite is down about 10 per cent over one year
- The S&P 500 is down about 5 per cent over one year
- The iShares DEX Universe Bond Index is up over 7 per cent since its low within the last year
While nobody wants negative returns (unless you’re looking to buy at cheaper prices!), this current equity correction doesn’t look as bad over one year, and looking at returns over that time frame provides some perspective. Over one year, the declines don’t look as dramatic, and that takes some of the fear out of equities.
Fixed income has outperformed. Looking at this outperformance in a rebalancing context, shows stock is currently cheaper.
No one is sure what the future holds, but what is sure is that stocks are a better deal than they were, and bonds aren’t as attractive.
Do yourself a favour: If you’re nervous about markets do some gradual, strategic buying. If you don’t have a plan regarding your asset allocation, get one.
Fear of losing may keep you from winning. Fear is a motivator, so if fear is keeping you from being a strategic investor, consider that fear should also keep you focused on your plan.
Investors have to accept that they will never know exactly what the market is going to do — and then plan accordingly.
Take comfort in the fact that someone like Warren Buffett recently invested $4 billion in the stock market.
Markets will either go up, down (or sideways) in the short-term. If you stay with a balanced portfolio, you have limited downside risk. But if you stay completely out of the market, expecting the four horsemen of the apocalypse, you may be disappointed if the horsemen don’t arrive.
A good long look at a stock chart after the 2009 market bottom (and such a chart can be found in one of the above links), might help you steel yourself, too. Markets had quite an increase until the latest correction began.
The planning you do now will serve you well when the market next moves into a bull phase and increases.
Related:
In times of volatility, you might want to focus on conservative dividend-paying investments
Part Two: Cash, corrections, the end and feeling fine
It`s the end of the world as we know it -- or is it?
Squabble, squabble, squabble: What happened to collaboration?
We’ve watched U.S. and European politicians do little. Squabbling doesn’t really count as a productive activity these days. Playing politics looks pretty selfish. Procrastinating looks plain stupid. The crisis in Europe is a serious issue that requires a serious response. Most probably, one that involves world-wide collaboration.
The markets are going to force politicians to get their acts together. This isn’t the time to think regionally. The global economy is here, like it or not. It’s time to act for the greater good rather than protecting one’s own backside.
We live in a global world. Interconnected, with dependencies that aren’t always transparent on the surface of things, a large event in any one country or region has far-reaching consequences. Yet too many politicians are shouting, “Mine!” Toddlers in daycare show more skill in sharing and thinking about their larger community.
iShare
Warren Buffett’s belief that increasing taxes on high income-earners is the way to go has become popular with many people. There seems to be a growing feeling of community amongst some individuals. A feeling that it’s time to share the wealth, and that tax cuts for the wealthy have gone too far.
Agree or disagree with Buffett’s belief on taxes, he`s a man that’s been, to understate the obvious, fairly successful at what he does. No wonder he has something like superhero status amongst Berkshire Hathaway’s shareholders and the followers of what’s become the “cult of Warren”. Not to mention that he’s one of the biggest philanthropists in history. He also advocates that the wealthy should follow his example. He counts Bill Gates amongst his admirers and a fellow in philanthropic efforts.
Project Band-Aid: (It’s [not] just a flesh wound)
Solutions in Europe have been largely plastic. But Band-Aid’s are short-term. Germany is coming under increasing pressure to be a leader in Europe rather than dwelling on its own self-interests. Take a look at the share prices of German banks or the MCSI Germany Index down 28 per cent year-to-date.
The market’s telling us you can’t have your cake and eat it, too. You can’t create markets, sell to them and leave them, according to investors. Not without paying for the engagement ring, at least. And the price tag is more than three months’ salary.
What investors would really like to see is a unified Euro bond. Perhaps leadership in Germany (and Europe broadly) needs to think more about the greater good (including Germany) rather than more national self-interests.
After all, why create a broader community in Europe if when crises appear leadership is going to become nationalistic? Marriages are for better or worse. If any one nation in Europe thinks it’s going to skate away from the Europen crisis, it’s sadly mistaken. The fact is the interconnectedness of financial instituitons, financial transactions and myriad moving parts is not going to ignore Germany. It’s punishing its stock market along with those of other European countries. And inaction and lack of adequate response will make this situation worse.
President Obama’s under pressure as well. American politicians have looked just as ridiculous as their European counterparts. The inability to collaborate, to forge solutions and move forward is getting a lot of press. Markets gave the Operation Twist strategy a big thumbs-down within moments, and today’s activity in the markets reinforces that.
So, wait a minute … Where’s opportunity?
Here:
- Corporate profits are near record levels
- Corporations are in better shape than some governments
- Corporate bonds look better than some nations’ bonds
- Global housing bubbles have burst already (largely)
In Canada, we are fortunate to have a strong bond market, but in the U.S. and Europe, there are more than a few questions regarding bonds. However, during the last few days’ extreme market volatility, investors still threw their money into the U.S. dollar and Treasuries – liquidity foremost in their minds.
Bonds and dividend yields
Bonds have done exactly what they were supposed to do in this correction. They have provided income and have risen dramatically as investors ran for cover. With bonds yielding very low rates of return (despite functioning as insurance in portfolios) in both the U.S. and Canada, the situation seems better and better for strong dividend-paying stocks long-term. Recently, we saw the S&P dividend yield rise above the 10-year Treasury. In Canada, dividend yields have also risen dramatically. Your dividend yield is paying you to wait. Not bad.
The economic situation may be deteriorating; still, it’s hard to imagine that GICs are going to be worthwhile as an investment for anything other than short-term concerns in the current environment of low interest rates.
Hopefully, many investors have been following a strategic protocol of rebalancing their portfolios. If they have, they don’t need to worry as much about the volatility in today’s markets. They may have to wait for better returns, but at the same time, they’ll get paid to wait knowing they own solid companies with a history of dividend payments.
Holding dividend-paying equities is really important because it’s the end of the world as we know it. But it’s been the end of the world as we knew it so many times before. Past is prologue. Perspective is very persuasive.
In the end, dividends provide what more speculative investments can’t:
- A solid income stream
While the pain created by the Financial Crisis, and the current crisis in Europe is serious, investors who’ve followed prudent rebalancing strategies will be able to:
- Count bond and dividend payments as they sleep
And that’s probably the best measure of whether your portfolio accurately measures your ability to tolerate risk … being able to sleep at night.
It’s the end of the world as we know it (like so many times before), but from an investor`s perspective, a solid income stream might help us feel fine.
Related:
As if on cue, Warren Buffett announced today that Berkshire Hathaway would buy back its own shares.
Warren Buffett bought $4 billion worth of stock in the third quarter as markets slid, investors worried and pessimism gathered steam.
Cash, corrections, the end and feeling fine
It’s all about the cash (and being able to sleep at night) when it comes to the stock market correction: Finding optimism in the insomnia of the moment
Didn’t the Twist go out a long time ago?
Somebody should tell the U.S. government that half-measures hardly ever satisfy anyone. Doing the Twist may be the middle ground, but now is the time for leadership and focusing on one’s convictions.
Is the glass still half-full?
Cash on Corporate Balance Sheets
In “Too much cash on corporate balance sheets: So, does this mean we can expect higher payouts?”, I wrote about the Everest of cash sitting on balance sheets. Today, Thursday, September 22, as I write, markets are moving down aggressively suggesting the Fed’s doing the Twist wasn’t what the markets wanted. There’s still one overwhelming fact that we shouldn’t overlook:
• Corporations are sitting on mountains of cash
What are they going to do?
Since they’re not in the business of becoming money market funds, (though some companies are starting to look like balanced funds by the mounds of cash they’re hording [more on this in a moment], these corporations need to do something with all this cash. After all, just like investors sitting on GICs, corporations sitting on cash aren’t going to get much of a return on it.
Now, let’s Think Apple, for example.
Seems the apple’s full of cash. But Apple’s not a balanced fund. It’s a company. Not everyone’s enamoured of Apple’s strategy.
While a lot of this cash hording relates directly to our current economic times, it still raises the ire of many people. High unemployment, especially amongst students, doesn’t make people rejoice when they hear you’re sitting on $76 billion.
With that amount of cash on the balance sheet, it seems management at Apple’s got the Mayan calendar out and are waiting for the end of the world. If that’s their forward-looking scenario, an iPhone or iPad won’t be much use …
“Hi … Mom, dad, I just thought I’d say bye … The end is coming …”
Perhaps investors in Apple have more confidence in Apple’s future than Apple management does?
But let’s revisit what’s most important to remember:
• Corporations have to do something with all this cash
• And some are
Microsoft recently raised its dividend: One of many companies to do this. It’s about sharing the wealth.
The fact that Apple hasn’t issued a dividend seems like a strategic mistake. It will be interesting to see how long investors will tolerate so much cash on Apple’s books.
Since opportunity appears in times of crisis, it’d be foolish to forget that all this cash has to go somewhere eventually.
Where?
- Dividends
- Mergers, acquisitions
- Buying back shares
- Towards hiring the most important resource, people, as the economy improves
Part Two is here.
JohnBlog 