For the first 30 or so years of working, saving and investing, you’ll be first in the mode of getting out of the hole (paying down debt), and then building your net worth (that’s wealth accumulation.). But don’t forget, wealth accumulation isn’t the ultimate goal. Decumulation is! (a separate category here at the Hub).
MoneySense has just published its annual feature, the ETF All-Stars 2022. For the first time in several years, I was not the lead writer on this package although I was involved in my role as Investing Editor at Large. We passed the writing reins to veteran financial freelance writer Bryan Borzykowski, who has previously written MoneySense’s annual Robo-advisor feature and is currently writing a new book to be titled ETFs for Canadians for Dummies.
As I point out in another MoneySense column, there is another ETF book published in 2021 that makes a good complement to the All-Stars package. Reboot Your Portfolio is written by Dan Bortolotti of PWL Capital. Dan was the lead writer of the first edition of the ETF All-stars and served as a panelist for several subsequent years, along with his PWL colleague Justin Bender. In recent years, PWL advisors Ben Felix and Cameron Passmore have served as some of the panelists responsible for selecting the All-stars. The team of 8 panelists is unchanged from last year.
As Bryan points out in his overview, by design, the panel didn’t make that many changes from previous years. The idea all along has been to provide a bunch of core low-cost, broadly diversified ETFs that don’t need to be changed every year. Certainly, the panel has never felt obliged to recommend brand new “theme” ETFs just for the sake of change.
Here’s my summary of the main changes:
Canadian Equities
No changes to last year’s lineup.
US Equities
The panel dropped the list of US equity ETFs from ten last year to seven this year.
International Equities
Last year’s picks return, plus the panel added three Emerging Markets ETFs: XEC, ZEM and EMXC.
Fixed Income
While Fixed Income has been a languishing asset class in recent months, the panel didn’t view this as alarming. Its previous lineup of Bond ETFs returns largely intact, with just one casualty: the panel decided to remove the Vanguard Global Bond ETF (VGAB.) For those who are nervous about more losses from rising interest rates, it continues to emphasize short-term bond ETFs like VSB and XSB
Note that in my recent MoneySense Retired Moneycolumn on the alleged Death of Bonds, I quote panelist Ben Felix, who still sees a role for fixed income in diversified portfolios. My column suggests those worried by rising rates can either park in treasury bills and wait for further interest rate hikes later this year, or ladder 1- and 2-year GICs every few months. Several 1-year GICs now pay close to 3%. That may be below the rate of inflation of late but at least its beats losses of near 10% sustained by aggregate bond ETFs. Continue Reading…
The daily escalation of the war in Ukraine is tragic, and the range of potential outcomes is unsettling. We are seeing a devastating humanitarian crisis and the human toll is immeasurable. Below we speak to some questions we have received and provide insights into how to best manage a portfolio.
Emerging market risks
Russia is one of a group of countries investors call ‘emerging markets,’ which reflects the stage of maturity and development of their economies and financial systems. Collectively, companies in emerging markets are an attractive source of growth for investors, despite their heightened risks. Stock markets in the developed world have comparatively low return expectations resulting from developed markets’ lower economic growth and higher valuations. At CC&L, our emerging markets strategy had a 2% weight to Russian stocks coming into the crisis. When considering this in the context of clients’ overall portfolios, this equates to less than one-tenth of one percent. Client portfolios have no exposure to companies in Ukraine.
What impact has the war had on portfolios?
While direct exposure to Russian and Ukrainian assets may be minimal, portfolios have not been immune to the volatility of the recent weeks caused by the war. Russia and Ukraine are important countries in the supply of commodities. Russia supplied approximately 12% of world oil and about 38% of Europe’s natural gas until the start of the war. Additionally, Russia and Ukraine — known as the breadbasket of Europe — provided roughly 25% of the world’s grain. Since the war began, commodity prices, particularly oil and gas, have shot up, acting like a tax on the global economy. This will put downward pressure on economic growth in many regions.
Context is key
It is important to understand the global economic landscape that was in place before the onset of aggression. The world was experiencing inflation levels not seen in decades, exacerbated by commodity underinvestment and global supply disruptions caused by the COVID-19 pandemic. Economic growth was riding high, boosted by the massive fiscal stimulus to offset COVID-19-related demand weakness. Continue Reading…
It’s common for investors to be concerned about inflation because it brings to mind the high inflationary period of the 1970s that completely wrecked stock and bond returns. It’s also easy for investors to draw spurious conclusions about government debt and linking that to the hyperinflation that occurred in Zimbabwe or Venezuela. This article aims to set the record straight about inflation and let investors know how to invest during periods of high inflation.
Are we experiencing high Inflation?
Inflation is one of the biggest concerns as we near the end of the global pandemic and economies begin to re-open. Governments around the world spent record amounts to keep their citizens, small businesses, and corporations afloat over the past two years, while a majority of those still employed were able to save money thanks to an economy devoid of travel and entertainment.
The result was a significant uptick in savings rates, with Canada’s household savings rate reaching a high of 28.2% in July 2020.
All this money sloshing around on the sidelines has been and will continue to be deployed into goods and services, creating additional demand for a still strained global supply chain. Consumers are ready to dine out in restaurants, attend concerts, and engage in “revenge travel” to make up for lost time.
When that happens, prices tend to rise. Canada’s consumer price index (CPI) has been rising steadily since March 2021. The 12-month change in the CPI for February 2022 was 5.7% (Stats Can). That’s well above the Bank of Canada’s 2% inflation target, and even above their acceptable range of 1-3%.
Meanwhile, the U.S. inflation rate soared to 7.9% in February 2022. (Trading Economics).
Both the Federal Reserve and the Bank of Canada previously signalled they were willing to let the economy run a little hotter than usual to make sure we achieve so-called full employment. But both central banks are now in tightening mode, raising interest rates by 0.25% in March 2022 to kick-off a series of expected rate hikes for the rest of 2022.
It’s clear that high inflation has arrived and persisted for longer than expected. The question is what should investors do about it (if anything)?
How Investors should position their portfolio to deal with high Inflation
What exactly is an inflation hedge? In an episode of the Rational Reminder podcast, Benjamin Felix said an inflation hedge needs the following three characteristics:
It will correlate positively with inflation, including responding to unexpected inflation.
It won’t be too volatile
It will have a positive real expected return
The problem, Felix said, is that asset doesn’t exist.
Recently a friend asked, “Pat, I see that several prominent Canadian investor advisors recently wrote articles that said it’s a bad time to buy bonds right now. Do you agree?”
He was surprised when I told him I haven’t bought any bonds for myself since the 1990s. I haven’t bought any for clients in the last couple of decades, except on client request.
In the 1990s, I used to buy “strip bonds” for myself and my clients, as RRSP and RRIF investments. This was the Golden Age of bond investing. Back then, high-quality bonds yielded almost as much, pre-tax, as the historical returns on stocks. In addition, they provided fixed income that simplified financial planning.
Bonds have tax disadvantages, of course. But you can neutralize those disadvantages by holding your bonds in RRSPs and other registered plans.
The big difference back then was that bond yields and interest rates were much higher than usual. That’s because we were still coming out of (or “cleaning up after,” you might say) the inflationary bulge of the 1970s and 1980s.
In the 1980s, government policies pushed up interest rates and took other measures to hobble inflation, and it worked. But interest rates stayed high for a long time after the government polices broke the back of inflation: kind of like finishing the antibiotic after the infection goes away.
High-quality stocks vastly superior to Bonds
Long-time readers know my general view on the stocks-versus-bonds dilemma. When interest rates are as low as they have been in recent decades, high-quality stocks on the whole are vastly superior to bonds. (See below for a further explanation). However, you have to understand the differences between the two. For one thing, stocks are more volatile than bonds. But volatility and safety are two different things.
Volatility refers to sharp price fluctuations, often due to short-term uncertainty and the randomness of short-term market movements. Safety refers to the risk of permanent loss. Continue Reading…
Markets ended the first part of the year on a particularly sour note. Over the past four months, the MSCI All Country World Stock Index fell 12.9% in USD terms. High quality bonds, which have held up well in past episodes of stock market weakness, have failed to provide any relief, with the Bloomberg Global Aggregate Bond index falling 11.3%. Given the “nowhere to hide” atmosphere of markets, even a 60%/40% global balanced stock/bond portfolio suffered a loss of 12.3%. Markets have entered a phase which differs from what we have witnessed over the past several years (and arguably over the past 40). In the following, we have done our best to share some of our most closely held beliefs about markets and investing, which we hope can serve as a guidepost for helping investors navigate the current market regime.
It just doesn’t matter … until it does
Most of the time, it doesn’t matter much whether your portfolio is positioned aggressively, defensively, or anywhere in between. Nonetheless, the fact remains that the big money is made or lost during the most violent bull and bear markets.
Defining a “normal” return for any 12-month period as lying between -20% and 20%, the S&P 500 Index behaved normally during 65.7% of all rolling 12-month periods between 1990 and 2021. Of the remaining 34.3% of periods, 29.0% were great (above 20%) and 5.4% were awful (worse than -20%)
Average 12-Month returns during Normal, Great, and Awful periods:
As the table above demonstrates, during normal periods there has not been a significant difference in average returns between the S&P 500 Index, the Bloomberg U.S. Aggregate Bond Index, and a balanced portfolio consisting of 60% of the former and 40% of the latter. It is another story entirely during the 34.3% of the time when bull and bear markets are in their most dynamic stages. The good news is that there are some key signals and rules of thumb that offer decent probabilities of reaping respectable gains in major bull markets while avoiding the devastation from the worst phases of major bear markets.
Don’t fight the Fed
It is with good reason that the “Don’t fight the Fed” mantra has achieved impressive longevity and popularity. The monetary climate – primarily the trend in interest rates and central bank policies – is the dominant factor in determining both the stock market’s major direction as well as which types of stocks out or underperform (sectors, value vs. growth, etc.). Once established, the trend typically lasts from one to three years. When central banks are cutting rates and monetary conditions become more accommodating, it’s a good bet that it won’t be long before stocks deliver attractive returns. In late 2008/early 2009, central banks responded to the collapse in financial markets by cutting rates aggressively and embarking on quantitative easing programs. This spurred a rapid recovery in asset prices. Similarly, to offset the economic fallout of the Covid pandemic, monetary authorities flooded the global economy with money, which acted as rocket fuel for stocks. Conversely, when central banks are raising rates and tightening the screws on the economy, the effect can range from limiting equity market gains to causing a full-fledged bear market (not an attractive distribution of outcomes). Once the Fed began hiking rates in mid-1999, it wasn’t long before stocks found themselves in the throes of a vicious bear market that cut the S&P 500 Index in half over the next two to three years. Similarly, when the Fed raised its target rate from 1% in mid-2004 to 5.25% by mid-2006, it set the stage for a nasty collapse in debt, equity, and real estate prices. When it comes to stocks, bonds, real estate, or most other asset classes, it’s all fun and games until rates go up, which ultimately causes things to break.
Markets don’t care what you think: NEVER fight the tape
The importance of not fighting major movements in markets cannot be overemphasized. Repeat as necessary: Fighting the tape is an open invitation to disaster. This advice not only applies to the general level of stock prices, but also to the relative performance of different sectors, value vs. growth, etc.
Ignorance, which can cause people to fight market trends, is a valid justification for making mistakes during the earlier stages of one’s investment experience. But after suffering the consequences, there are neither any excuses nor mercy when you fight the tape a third or fourth time. The markets only allow so many mistakes before they obliterate your wallet. The perils of following rather than fighting trends are well summarized by investing legend Marty Zweig, who compared fighting the tape and trying to pick a bottom during a bear market to catching a falling safe. Zweig stated: “If you buy aggressively into a bear market, it is akin to trying to catch a falling safe. Investors are sometimes so eager for its valuable contents that they will ignore the laws of physics and attempt to snatch the safe from the air as if it were a pop fly. You can get hurt doing this: witness the records of the bottom pickers on the street. Not only is this game dangerous, it is pointless as well. It is easier, safer, and, in almost all cases, just as rewarding to wait for the safe to hit the pavement and take a little bounce before grabbing the contents.” To be clear, there is no free lunch in investing. Being on the right side of major market moves necessitates getting whipsawed over the short-term every now and then. Inevitably, you will sometimes be zagging when you should be zigging and zigging when you should be zagging. You can get head faked into cutting risk only to watch in frustration as markets rebound, and you can also get tricked into becoming aggressive just before a decline in stock prices. The stark reality is that only geniuses and/or liars buy at the lows preceding major uptrends and exit the very top before the onset of bear markets. Realistically, you can only hope to catch (or avoid) the bulk of the big moves. Getting whipsawed every now and then is a small price to pay for reaping attractive returns during the good times while avoiding large bear market losses.
You don’t need to be perfect. But you’d better be flexible
It doesn’t matter whether you are an aggressive or conservative investor, so long as you are a flexible one. The problem with most portfolios (even professionally managed ones) is that they are not flexible. Conservative investors tend to stick with defensive portfolios heavily weighted in high grade bonds, utility stocks, etc. They never reap huge gains, but they also never get badly hurt. Aggressive investors, on the other hand, often buy risky stocks or speculate in real estate using high degrees of leverage. They make fortunes in boom times only to lose it all in bad times when the proverbial tide recedes.
Neither approach is sound by itself. Being aggressive is okay, but there are nonetheless times to gear down and be a wallflower. By the same token, there are market environments in which even conservative investors should be somewhat aggressive. Continue Reading…
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