One key factor in successful investing — apart of course from picking good stocks (or ETFs that invest in those stocks) — is to diversify your portfolio.
Our main suggestion would be to make sure that your holdings are always well-balanced among most if not all of the five economic sectors: Manufacturing, Consumer, Utilities, Resources, and Finance.
That way, you avoid overloading yourself with stocks that are about to slump simply because of industry conditions or changes in investor fashion.
By diversifying across the sectors, you also increase your chances of stumbling upon a market superstar: a stock that does two to three or more times better than the market average. These stocks come along every year. By nature, though, their appearance is unpredictable.
It’s also essential to diversify within each sector. For example, you shouldn’t let technology stocks dominate your Manufacturing holdings, nor let telecommunications or phone stocks dominate your Utilities holdings.
What about geographic diversification?
We’ve long said that most Canadian investors should hold the bulk of their portfolio in high-quality, dividend-paying Canadian stocks well balanced across the five sectors (or ETFs that hold those stocks).
We also feel that virtually all Canadian investors should have, say, 20% to 30% of their portfolios in U.S. stocks (many of which also offer you international exposure through their foreign operations).
Beyond that, top international stocks or ETFs can also add valuable diversification to your portfolio—through exposure to foreign businesses and to foreign currencies.
To demonstrate how geographical diversification can benefit investors, we examined the risks and returns of an ETF portfolio consisting of 50% Canadian equities, 30% U.S. equities, and with 20% in equities around the rest of the world. We then compared the risk and returns of this diversified portfolio with a broad Canada-only index.
Geographic diversification can cut risk and raise returns
Our results showed that the risk of the diversified portfolio was lower than the Canadian-only portfolio, while the returns were higher. Continue Reading…
As I’ve often mentioned, the biggest risk you face as an investor is hidden or unrecognized conflicts of interest. It’s not because any one conflict of interest can do great damage to your finances. The risk comes out of the fact that conflicts of interest are everywhere.
That’s especially so with many ethical investments, also known as ESG (Environmental, Social and Governance) issues. These issues may come with pure motives, but they require outlays that depend on judgment calls rather than financial analysis. Companies deal with these issues by hiring outside consultants and firms to help with decisions. These outsiders supply guidance on how companies should spend their money. The advice they give can raise or lower a company’s profits. This is a potential source of conflicts of interest, for the companies and the consultants.
Alex Edmans is a professor of finance at London Business School and author of Grow the Pie: How Great Companies Deliver Both Purpose and Profit. He is widely viewed as an ESG advocate.
In an August 19 Wall Street Journal article entitled “A Progressive’s Case for Getting Rid of ‘ESG,’” Dr. Edmans wrote, “ESG has outlived its usefulness. It’s time we scrap the term.” He added, “While an incorporation of ESG can enhance financial and social returns, an obsession with ESG can distract companies and investors from both objectives — by causing them to ignore non-ESG factors that may be even more relevant for long-term value.”
This is what you’d call a “high-level view.” However, if you let ESG and related or similar issues influence your investment decisions, it can have a negative impact on your personal finances.
The downside of ethical investments
Early in my career, I began writing about the harm that conflicts of interest can have on your investments. Back in 2010, I started writing an occasional column for The Toronto Star, on a wide variety of investment issues and questions from readers.
The term “socially responsible investing” was coming into fashion back then. In one of my columns, I addressed a reader’s question about investing in a mutual fund that described itself as socially responsible.
My view — then and now —i s that a socially responsible fund may not expose you to any extra risk. It may simply mean the fund’s managers are highly principled and want to do some good in the world. Of course, it may also mean they see the marketing value in declaring their good intentions.
In any event, the best way to get to a destination is generally to go there directly, rather than take a two-stage route. So I advised readers that if they wanted to do some good in the world, they should invest with profits in mind, then give a portion of their gains to a charity of their choice. Continue Reading…
When deciding which ETFs to invest in, follow these criteria for maximum success
Image courtesy TSInetwork.ca
ETFs aim to provide broad market exposure with low cost and our Best ETFs for Canadian Investors advisory covers ETFs like no other publication in North America.
Notably, we recently released our top ETF to buy in 2024 in this newsletter. However, you’ll need to subscribe to find out what that top ETF to buy in 2024 is!
This ETF offers a solid 1.4% yield, while at the same time charging you a very low 0.0945% MER. Going forward, the fund — and its investors — should gain from an expanding U.S. economy. Plus, the ETF’s U.S. dollar exposure provides valuable currency diversification for Canadian investors; that’s a long-term positive.
When it comes to ETFs, we take a close look at the following criteria:
6 Important considerations for choosing ETFs to invest in:
Know how broad the ETF’s stock holdings are, so you can determine its volatility. The broader the ETF, the less volatility it may have. A sector-based ETF, like one that tracks resource stocks, may be more volatile.
Know the economic stability of countries that an international ETF invests in. It’s also worth mentioning that foreign leaders may not be your ally when it comes to passing laws or imposing regulations that can affect your investments
Know the liquidity of ETFs you invest in; look at the volume of shares that trade hands on a daily basis.
Consider buying ETFs in a lump sum rather than with periodic small amounts, so you can cut down on brokerage fees.
ETFs can still be volatile, even with the diversification they offer.
Don’t invest in ETFs that show wide disparities between the stocks they hold and the investments that the sales literature describes. Despite the increased attention for ETFs, many ETF managers continue to describe their investing style in vague (or sometimes misleading) terms.
Meanwhile, rather than using the six criteria above, some investors decide when to buy an ETF using technical analysis.
Technical analysis is a useful tool in deciding when to buy ETFs, but only if you recognize it as one of many tools. Before making any recommendations or transactions in client accounts, I always look at a chart. However, I don’t look at the chart for a prediction of what’s going to happen. I look to see if the pattern on the chart seems to support the view I’ve formed of the stock/ETF based on its finances and other fundamental factors. Continue Reading…
Investing advice when Putin’s at war against Ukraine. Plus, Putin and the Israel-Hamas War
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Russia launched the war in 2014, during the second Obama term, when it invaded Ukraine’s Crimean Peninsula. At the time, the U.S. and NATO were still unsure about how to react to Russia’s aggression toward its former possessions. Many observers felt Russia was just trying to retrieve some of the stature it lost with the collapse of the Soviet Union in the early 1990s.
When Russia invaded Ukraine in 2022, it expected Ukraine to collapse right away (the way France collapsed under the 1940 German invasion, say). The U.S. and other observers feared/expected the same. They still began sending security aid to Ukraine before the invasion. They also used threats of trade and financial sanctions to try to scare Russia off. These steps failed. However, Ukraine fought back surprisingly well and attracted additional aid from the West.
Putin soon saw that he had guessed wrong. But he assumed the West would quickly lose interest. Instead, the West stepped up its aid. Russia then began a series of veiled threats of military escalation, all the way up to tactical nuclear weapons.
My sense is that after its initial stumble, Russia still hoped/believed that if it kept up the military pressure and escalation/nuclear threats long enough, Ukraine and its supporters would agree to a lengthy ceasefire that would work in Russia’s favour.
It seemed to me and many other people that this was unlikely. In April of that year, I wrote that “Russia could launch a nuclear war, but it would find itself fighting against most of the advanced countries of the world. Putin is vain and may be deranged, but he isn’t stupid.”
Later I voiced the off-the-cuff view that any nuclear attack on Ukraine would spark a much more lethal response from NATO forces, which vastly outnumber Russia’s.
Just recently I came across the actual NATO-versus-Russia figures (below) from veteran Toronto journalist Diane Francis, writing in her Substack.com publication. (Note: her chart refers to a Military Asset as a “Characteristic.”)
The numbers show an even greater numerical advantage for NATO than I imagined. That’s just the start.
The West is also way ahead of Russia in technology, sanctions, finances, morale, global support and pretty much anything else. Russia’s main advantage in war is its ruthlessness in throwing untrained soldiers — mostly from prisons or Russian-speaking racial/cultural minorities — onto the front lines, until the other side runs out of ammunition.
Putin can only hope that Biden or a successor loses his grip and abruptly pulls out of Ukraine the way the U.S. pulled out of Afghanistan in August 2021, after two decades of hostilities.
As the sarcastic one-liner goes, that’s not likely.
Nobody can predict these things, of course. My sense is that we are seeing the last gasps of Europe’s last empire. I’d guess the outcome won’t be pretty or quick, but it may turn out to be a historical milestone. A worldwide swing back toward democracy and away from authoritarianism just might follow.
Putin and the Israel-Hamas War
My guess is that the Israel-Hamas war is just getting started and will last a long time. I also suspect that Putin had something to do with getting it started, and will do what he can to keep it going. After all, when it comes to running his country, Putin takes a grasping-at-straws approach.
Putin may think that bringing the longstanding Mideast conflict back into the headlines is going to improve his chances of conquering Ukraine and bringing the Soviet Union back from the dead.
He thinks taking a long shot is better than no shot at all. Who knows? He might get lucky.
Early on in his war on Ukraine, Putin seemed to think that Chinese dictator Xi Jinping was going to take pity on him and his country, and offer free money and/or weapons to shore up Russia’s Ukraine invasion. Instead, Xi insists on staying out of the war, while paying discount prices for Russian oil. He takes special care not to let his country get caught up in the economic sanctions that the U.S. and NATO countries and allies are directing against the Russians.
It’s not that Putin is stupid. If a war between Israel and Hamas turns out to be a big drain on the U.S. budget, the U.S. might have less money available to arm Ukraine.
Up until lately, however, Israel has had little to say about Russia’s treatment of Ukraine. Israel may soon take a more active role in helping Ukraine defend itself.
Any war is a terrible thing, and this one is no different. Meanwhile, the stock market seems to be creeping upward. Maybe it knows something that Putin hasn’t figured out. If you’re looking for investing advice related to the wars around us, spend more time learning about the wars themselves.
Meantime, if your stock portfolio made sense to you a week or two ago, we advise against selling due to Mideast fears
No matter what the state of the world, here are three rules you can follow for maximum portfolio success:
Our first rule will help you stay out of high-risk, low-quality investments. These investments are always available, in good and bad markets. They come with hidden risks due to conflicts of interest and other negatives. Every year, they lead many inexperienced investors to substantial losses. Continue Reading…
Discover the Keys to Identifying Dividend ETFs that offer Consistency, Quality, and Long-Term Growth
Image from Pexels/Anna Nekrashevich
Higher interest rates mean dividend-paying stocks must increasingly compete with fixed-income investments for investor interest. However, sustainable dividends still offer an
attractive and growing income stream for investors.
Companies that pay regular and growing dividends have performed very well over the long run when compared to the broad market indices. For example, a simple strategy such as selecting stocks with an extended history of uninterrupted dividend growth, such as represented by the S&P 500 Dividend Aristocrats, has added 11.5% per year over the past 30 years. This compares to the 10.0% annual gain for the S&P 500 Index. And not only did the dividend payers beat the overall market, but they were also less volatile.
The superior long-term performance of the dividend growth companies can be attributed to a combination of several factors: Companies with long histories of regular and growing dividend payments generally have sound competitive business models and growing profits; these are also companies with experienced managements that make disciplined capital allocation decisions, strive for lower debt levels, and operate firms more profitable than their peers.
Notably, though, the Dividend Aristocrats’ performance lagged over the past 5 years against the S&P 500 index.
Most of this underperformance came over the last year and a half, as higher interest rates made fixed-income investments, such as GICs, more attractive for income-seeking investors when compared to dividend-paying equities.
The dividend sweet spot
Income-seeking investors who decide to take on the risk of the stock markets are faced with a wide range of options including “yield enhanced” dividend-paying ETFs, moderate-yielding companies with average growth rates, and low-yielding but fast-growing companies. Then there is also the group of companies that have very high dividend yields and may seem attractive but, unfortunately, come with elevated risk.
In many cases, a high yield may be a warning sign that all is not well with a company and that future dividend payments are at risk of being cut.
As well, a dividend cut, or even an outright dividend suspension, is often accompanied by a steep decline in the share price, as income investors dump their former dividend favourites.
A 2016 study by a group of U.S.-based academics provides some statistical guidelines for sensible dividend-based investing.
In reviewing the performance of almost 4,000 U.S. companies over 50 years, they found that dividend-paying stocks beat non-dividend payers.
In particular, the middle group of dividend yielders (i.e., those with an average yield of 4.3%) surpassed both the low yielders and the high yielders in terms of total return. Equally important, this superior performance was achieved with lower risk, as measured by the standard deviation of returns.
Based on this long-term study, it makes sense to avoid the highest-yielding stocks and rather look for companies with moderate yields and sound growth prospects. This safety-first approach will result in a lower yield but likely provide a better total return (dividends plus capital) at lower risk.
How to spot dividend ETFs worth investing in
When investing in dividend-paying companies through an ETF, here are key factors to consider: Continue Reading…
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