All posts by Pat McKeough

Ideally, what does a diversified portfolio look like? Here are some top examples

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What does a diversified portfolio look like? A well-diversified portfolio balances risk by spreading investment holdings out across industry sectors and more

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What does a diverse portfolio look like? It’s a question we hear often from the Pat McKeough Inner Circle. We believe a well-diversified portfolio has a few specific qualities, including holdings spread out across most if not all of the five main economic sectors, geographic diversification, both conservative and more-aggressive holdings, and both market leaders and laggards. These asset allocation strategies help ensure long-term stability.

All in all, you will improve your chances of making money over long periods, no matter what happens in the market, if you diversify your holdings as we recommend, and so successfully answer the key question: what does a diverse portfolio look like?

What does a diversified portfolio look like? Holdings in the five main sectors

As we recommend to the Pat McKeough Inner Circle, we believe you spread should your money out across most, if not all, of the five main economic sectors: Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities.

Here are some tips on diversifying your stock portfolio by sector:

  • When it comes to answering the question what does a diverse portfolio look like? remember stocks in the Resources and Manufacturing & Industry sectors expose you to above-average share price volatility.
  • Stocks in the Utilities and Canadian Finance sectors, however, entail below-average volatility.
  • Consumer stocks fall in the middle, between volatile Resources and Manufacturing companies, and the more stable Canadian Finance and Utilities companies.

Most investors should have investments in most, if not all, of these five sectors to successfully answer the question what does a diverse portfolio look like? The proper proportions for you depend on your investment temperament and circumstances. These asset allocation strategies should be reviewed regularly.

The Pat McKeough Inner Circle, like most conservative or income-seeking investors, may want to emphasize utilities and Canadian banks for their high and generally secure dividends. Regardless, it always pays to look closely at a company’s recent acquisitions and the risk associated with that growth strategy.

More-aggressive investors might want to increase their portfolio weightings in Resources or Manufacturing stocks.  However, at the same time, you’ll want to spread your Resource holdings out among oil and gas, metals and other Resources stocks for diversification within the sector, and for exposure to a number of areas.

What does a diverse portfolio look like? Balanced across geography

As it’s a mistake to focus your portfolio on a company that relies on a number of recent acquisitions for growth, one of the worst things you can do is invest so that your portfolio would suffer a great deal due to a localized downturn in any one city, province or state. Good portfolio management also means balancing your investments geographically.

Like the Pat McKeough Inner Circle’s most successful investors, you should avoid focusing your portfolio on any one country or region. And a lower-risk way to add international exposure to your portfolio is to hold multinational U.S. stocks such as, say, IBM, McDonald’s and Walmart. We cover all three of these companies in our Wall Street Stock Forecaster newsletter. Continue Reading…

Consider all Retirement Investment Management Options for a Financially Sound Future

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Here’s a look at some of your best retirement investment management options and choices. These include pensions, RRSPs, RRIFs and more.

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Your retirement investment management plan should build in contingencies for long-term medical needs and supplemental health insurance. As well, you should factor in caring for loved ones who are unable to take care of themselves.

When you work out a plan for your retirement, make sure that you aren’t basing your future income on overly-optimistic calculations that will end up leaving you short.

Retirement income can come from many different sources, such as personal savings, Canada Pension Plan, Old Age Security, company pensions, RRSPs, RRIFs, and other types of investment accounts.

 

Learn how your retirement investment management works in a Canada Pension Plan (CPP)

The Canada Pension Plan, or CPP, is the name for the Canadian national social insurance program. The program pays out based on contributions, and it provides income protection for individuals or their survivors in the instance of retirement, disability or death. Since 1999, the CPP has been legally permitted to invest in the stock market.

Nearly all individuals working in Canada contribute to the CPP, unless they live in Quebec, where the Quebec Pension Plan (QPP) exists and provides comparable benefits.

Applicants can apply to receive full CPP benefits at age 65. The CPP can be received as early as age 60 at a reduced rate. It can also be received as late as age 70, at an increased rate.

Here’s a look at some of the pensions or benefits provided by the Canada Pension Plan:

  • Retirement pension
  • Post-retirement pension
  • Death benefit
  • Child rearing provision
  • Credit splitting for divorced or separated couples
  • Survivor benefits
  • Pension sharing
  • Disability benefits

Use a Registered Retirement Savings Plan (RRSP) as a starting place when you look into retirement investment management

An RRSP is a great way for investors to cut their tax bills and make more money from their retirement investing.

RRSPs were introduced by the federal government in 1957 to encourage Canadians to save for retirement. Before RRSPs, only individuals who belonged to employer-sponsored registered pension plans could deduct pension contributions from their taxable income.

RRSPs are a form of tax-deferred savings plan. They are a little like other investment accounts, except for their tax treatment. RRSP contributions are tax deductible, and the investments grow tax-free.

You might think of investment gains in an RRSP as a double profit. Instead of paying up to, say,  50% of your profit to the government in taxes and keeping 50% to work for you, you keep 100% of your profit working for you, until you take it out.

Convert an RRSP to a RRIF to create one of the best investments for retirement

A Registered Retirement Income Fund (RRIF) is another good long-term investing strategy for retirement.

Converting your RRSP to a RRIF is clearly one of the best of three alternatives at age 71. That’s because RRIFs offer more flexibility and tax savings than annuities or a lump-sum withdrawal (which in most cases is a poor retirement investing option, since you’ll be taxed on the entire amount in that year as ordinary income). Continue Reading…

Canadian Utility ETFs offer Lower Risk and tax-advantaged dividends

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Utility investments typically benefit from stronger economic activity, and a top Canadian utilities ETF will let you take advantage of this: if you watch for low fees and sound stock holdings

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Utility stocks are shares in companies that provide electric power, telecommunications, pipeline services and so on. Canadian utility shares have always been great sources of tax-advantaged distribution income.

While most utility stocks are steady income producers, some utilities also offer opportunities for growth. This happens mostly when utilities expand into new markets or geographic regions.

We still feel that investors will profit the most with a well-balanced portfolio of high-quality individual stocks, but ETFs can also play a role in a portfolio.

Holding utilities, or a Canadian utilities ETF, can be a sound component of most investor portfolios.

What kind of companies are included in Canadian utilities ETFs?

Canadian utilities ETFs typically include companies from several sectors, such as electric utilities providing power generation and distribution, natural gas utilities, water utilities, telecommunications companies, and pipeline operators that transport energy resources.

What are the risks of investing in Canadian utilities ETFs?

The main risks of investing in Canadian utilities ETFs include regulatory changes that could affect utility companies’ profitability, interest rate sensitivity that can cause price drops when rates rise, and concentration risk if the ETF is heavily weighted toward a few companies or specific utility subsectors.

Characteristics of the best utility investments

The best utility stocks, or ETFs that hold them, can deliver predictable, lower-risk dividends.

Traditionally, the utilities sector is said to suffer when interest rates rise: or if the market is worried about a rise.

This is because utilities typically have a lot of debt as part of their capital structure, and higher rates make it more expensive to raise money and refinance existing debt. As well, their shares, which typically offer high yields, compete with fixed-income instruments for investor interest.

However, higher interest rates are usually accompanied by increased economic activity and growth. That stronger economic activity is good for utilities: It pushes up demand for their power and so on and at the same time boosts the electricity rates they charge their customers.

Regardless of those positives, as interest rates rise, investors often sell off, or avoid, utilities stocks, and that can push down their price. Given the formula for dividend yield — specifically, annual dividend rate/stock price — a falling stock price (the bottom number in the fraction) pushes up the yield. In other words, when the stock price goes down, its dividend yield goes up.

How are Canadian utilities ETFs structured?

Canadian utilities ETFs are typically structured to track specific indexes using different weighting methodologies, with equal-weight and market-cap approaches being the most common.

When looking for investments in the utility sector, investors should avoid judging a company based solely on its dividend yield. That’s because a high yield can sometimes be a danger sign rather than a bargain. For example, a company’s dividend yield could be high simply due to its share price having dropped sharply (because you use a company’s share price to calculate yield). That low price can be a sign of an imminent dividend cut.

Apart from a good dividend yield, the utility stocks you invest in should have a long history of paying (and raising) their dividends. For a true measure of stability, focus on those companies that have maintained or raised their dividends during economic and stock-market downturns.

 Are Canadian utilities ETFs a good investment for stability and income?

Canadian utilities ETFs typically provide stable income through consistent dividends and lower volatility compared to broader market investments, making them generally suitable for investors seeking stability and regular cash flow.

The best ETFs are focused on simple goals. Instead of picking and trading investments, operators of these ETFs manage investors’ money “passively,” with the goal of duplicating the performance of a market index. This lets the operator charge very low MERs (management expense ratios) compared to an average MER on conventional mutual funds of 2%-3%. Continue Reading…

Nobody can consistently make accurate Stock Predictions today — or any other time

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Relying on stock predictions today to forecast future market trends is likely to cost you money. Follow this advice instead: Focus on share value and using our three-part investing philosophy to profit

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We think it’s a mistake to let stock predictions today guide your investments, but especially so at times like now, when new ideas and differences of opinion are continually streaming into the markets. They make more choices available to you if you are trying to create or update a prediction. This is hard on investors who focus on predictions. When more predictions are floating around, predictions fans have more ways to guess wrong.

The best way around this problem is to quit making predictions. Forget about trying to pinpoint future events or developments. Everybody who tries often enough will wind up making some good guesses. However, no one can foresee the future.

Instead, take a close look at what we know about the current investment situation. Then, try to spot investments that seem to offer attractive opportunities under a variety of future conditions.

No one can consistently make stock predictions today — or any other time

In investing, it pays to avoid relying on stock market predictions. Successful predictions can pay off enormously, of course. But nobody can consistently or even frequently predict the future in individual stocks or the market. The more your investment success depends on predictions, the greater the risk you face.

On the other hand, it’s possible to assess investment conditions in a general sense. That way you may recognize when it’s a good time to buy stocks, if you can afford to hold them for the next couple of years or longer. If you do most of your buying in times like that, you’ll wind up making a lot of money over the course of your investing career.

Keep a long-term view in mind when considering stock predictions today and “a good time to buy”

Mind you, “a good time to buy” is an opinion on a long-term probability. It doesn’t mean the market will go up right away. For that matter, you may buy just prior to one of the market’s occasional downturns. You have to accept this risk if you want to profit from the stock market’s ability to turn middle-income people into well-off retirees over the course of a few decades.

The funny thing is that many people hurt their prospects by going at it backwards. Instead of looking for good times to buy, which are relatively plentiful, they fixate on avoiding the market’s relatively rare downturns. They try to do that by hunting for reasons to stay out of the market. Continue Reading…

How to stay calm and Invest confidently amid Stock Market Fluctuations

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Letting unnecessary stock market worries take hold of your investment decisions can lead to much bigger problems than just finding stocks to buy

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Our early ancestors had to be on guard against threats in their environment. They were under constant threat. At night, if you woke to every sound from the bushes, you lost some sleep, but you cut your risk of being eaten by a lion or killed by an enemy. Today we face much less risk from animal predators and human marauders. But many people still carry this hair-trigger fear response. We spend more time than we should worrying about things that will never happen. This includes stock market worries.

That’s especially true of investors, who generally think more about the future than other people. It’s true all the more of subscribers to our newsletters and members of my Inner Circle service.

Understand stock market worries and risk so you can put everything in perspective

That’s because many of you are the kind of people who seek out investment information from a variety of written sources, where it’s much more extensive and detailed than what you get from a glance at the headlines, the evening news or cable TV. However, some of that information is biased, overblown or incorrect.

This doesn’t mean you should ignore potential threats. You just need to put them in perspective.

Learn what experienced investors do about common stock market worries

There is never a shortage of ways to ease your stock market worries. “You never go broke taking a profit,” is a favourite of brokers I’ve met over the years. They used them to spur their clients to do more trades, to boost their own commission income.

Our view now is that stocks are still a good place for your money, if you can afford to stay invested for several years. If you expect you will need to take money out of your portfolio, you should think about selling sooner than you need to.

Look beyond immediate stock market movements to help reduce your anxiety and stock market worries

Stock market trends are the general direction in which the stock market is heading. These market trends are dictated by a number of factors: what sector investors favour at the moment, economic and world news, interest rates and other trends from industries such as technology or resources, and so on. These trends could be positive or negative, and they could lead to a huge boom for a stock market. They could also lead to a big downturn. Continue Reading…