Tag Archives: asset allocation

Should you use an All-Weather portfolio?

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By Mark and Joe

Special to the Financial Independence Hub

Stock market volatility can and will happen, which can really spook many investors.

To help with that, should you use an all-weather portfolio for changing market conditions?

Would an all-weather portfolio be best long-term?

How would I build an all-weather portfolio using Canadian ETFs?

Read on and find out our take, including the pros and cons of this all-weather investing approach.

The portfolio is designed for all seasons

If you prefer a more passive approach to investing, building an all-weather portfolio may be right for you. While this portfolio is designed to perform well during all seasons of the market, from an economic boom or bust and the messy stuff in between, we’ll see below that this approach is not without some flaws and drawbacks – just like any investing approach. Further, you could be missing out on some important aspects or assets for investing entirely.

Understanding how an all-weather portfolio works can help you to decide if this path could be right for you, or even if a blended all-weather approach could make much more sense.

What Is an All-Weather Portfolio?

Just as the name sounds, an all-weather portfolio is a portfolio that’s built to do well, regardless of changing market conditions.

This investing approach was popularized by Ray Dalio, a billionaire investor and founder of Bridgewater Associates, the largest hedge fund in the world. At the time of this post, Bridgewater currently manages over $140 billion in assets.

(FYI – this sounds very impressive of course, but we don’t invest in hedge funds and neither should you!)

Dalio’s all-weather philosophy is largely this:

Diversify your investments, hold specific asset classes in certain allocations, such that the portfolio can perform consistently throughout most economic conditions. 

This includes periods of increasing volatility, rising inflation, and more. More specifically, this portfolio strategy is designed to help investors ride out four specific types of events:

  1. Inflationary periods (rising prices)
  2. Deflationary periods (falling prices)
  3. Rising markets (bull/booming markets)
  4. Falling markets (bear/busting markets)

How an All-Weather Portfolio Works

Based on back-testing, essentially Dalio and his Bridgewater team came up with a model after studying the relationship between asset class performance and changing market environments. The result of this relationship crystallized the following asset class allocation that would investors to benefit whether the market is moving up or down or sideways.

Here is the asset class breakdown:

 

We’ll provide more detailed funds to mimic this portfolio in a bit.

One thing you’ll realize from the portfolio above is the all-weather portfolio takes a much different approach than age-based allocations (i.e., more bonds as you get older in your portfolio), the traditional 60/40 balanced portfolio, or other popular couch potato approaches. It essentially ignores an investor’s personal need for changing risk appetite. A drawback we’ll discuss more in a bit.

The theory of the All-Weather Portfolio is that:

  • The equity portion will thrive in bull markets.
  • Commodities and gold should support the portfolio for inflation.
  • Bonds will help investors when stock market growth is suffering…

You get the idea. Continue Reading…

Introducing Harvest High Income Shares: Top U.S. Stocks and High Monthly Income

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By Ambrose O’Callaghan, Harvest ETFs

(Sponsor Blog) 

On Wednesday, August 21, 2024, Harvest ETFs introduced another innovative product in its growing lineup: Harvest High Income Shares ETFs.

These single-stock ETFs invest in top, well-favoured U.S. stocks, with a focus to provide high income every month from covered call writing.

The Top U.S. Stocks in Scope

Eli Lilly. A dominant global pharmaceutical manufacturer and distributor.

Amazon. A global e-commerce giant that has established a massive logistics network and an innovator in enterprise cloud computing.

Microsoft. A global leader in software services and solutions, as well as hardware technology.

NVIDIA. Established as a huge force in the semiconductor industry, with its graphics processing units (GPUs) at the forefront of the AI revolution.

These U.S. stocks are well known and sought after. They are four of the largest and most widely held stocks in today’s market. They offer a significant building block for covered call writing strategy, in that the shares of these massive companies have very deep and liquid option markets. Further, the level of volatility that accompanies the share prices is high. That makes these great stocks for Harvest’s active and flexible covered call writing strategy.

The Harvest Process:  Strong focus on High and Reliable Income every month

Record matters, and Harvest has it. For 15 years and counting, Harvest has pursued an active covered call writing strategy focused on generating high income, every month for investors in its Income ETFs lineup. Supported by its proven covered call strategy, Harvest has delivered nearly $1 billion in total monthly cash distributions over its 15-year history to investors.

This new, innovative product line, focuses on investing in shares of a single company targeting the largest, most widely held U.S. stocks. Harvest’s investment team — with a combined six decades of investment experience — will use Harvest’s well-established covered call writing strategy to provide high monthly income to investors while delivering on what sets Harvest apart;  that is, ensuring that investors enjoy not just high, but consistent, stable, predictable, and reliable income each month.

The premium income from covered call writing can be treated as capital gains. That means the high income that the Harvest High Income Shares ETFs seek to provide can be regarded as being among most tax-efficient income. The Harvest High Income Shares  ETFs are organized as Canadian Trust Units and are available in Canadian and U.S.-dollar-denominated Units. As open-end mutual funds listed on an exchange (“ETFs”), on the TSX, they provide trading and reporting flexibility for Canadian investors.

Innovation, High Monthly Income, and Upside

The covered calls strategy used in the Harvest High Income Shares  ETFs will operate with up to 50% write level. Harvest’s portfolio management team has stress tested these equities with an average 2-year implied volatility. It found they can produce high levels of income at much lower write levels. Therefore, a 50% write level, in their view, provides a conservative floor to ensure unitholders will be able have reliable high-income generation every month. Continue Reading…

Using Defensive Sector ETFs for the Canadian retirement portfolio

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By Dale Roberts

Special to Financial Independence Hub

In a recent post we saw that the defensive sectors were twice as effective as a balanced portfolio moving through and beyond the great financial crisis. The financial crisis was the bank-failure-inspired recession and market correction of 2008-2009 and beyond. It was the worst correction since the dot com crash of the early 2000’s. Defensive sectors can play the role of bonds (and work in concert with bonds) to provide greater financial stability. With defensive sector ETFs you might be able to build a superior Canadian retirement portfolio.

First off, here’s the original post on the defensive sectors for retirement.

The key defensive sectors are healthcare, consumer staples and utilities.

And a key chart from that post. The defensive sectors were twice as good as the traditional balanced portfolio. The chart represents a retirement funding scenario.

You can check out the original post for ideas for U.S. dollar defensive sector ETFs.

The following is for Canadian dollar accounts. Keep in mind, this is not advice. Consider this post as ‘ideas for consideration’ and part of the retirement portfolio educational process.

The yield is shown as an annual percentage as of mid March, 2023.

80% Equities / 20% Bonds and Cash

Growth sector ETFs

  • 15% VDY 4.6% Canadian High Dividend
  • 15% VGG 1.8% U.S. Dividend Growth

Canadian defensive sector ETFs

  • 15% ZHU 0.5% U.S Healthcare
  • 10% STPL 2.4% Global Consumer Staples
  • 5.0% XST 0.6% Canadian Consumer Staples
  • 10% ZUT 3.7% Canadian Utilities

Inflation fighters

Private Equity: A Portfolio Perspective

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So don’t ask me no questions
And I won’t tell you no lies
So don’t ask me about my business
And I won’t tell you goodbye

  • Lynyrd Skynyrd
Image courtesy Outcome/Shutterstock

By Noah Solomon

Special to Financial Independence Hub

I know virtually nothing about investing in private companies. However, I do know a thing or two about the theoretical and practical aspects of asset allocation and portfolio construction. In this vein, I will discuss the value of private equity (PE) investments within a portfolio context. Importantly, I will explain why PE investments may contribute less to one’s portfolio than is widely perceived.

Before I get into it, I am compelled to state one important caveat. Generalized statements about PE are less meaningful than is the case with public equities. The dispersion of returns across public equity funds is far lower than across PE managers. Whereas most long stock funds fall within +/- 5% of the average over a several year period, there is a far wider dispersion among underperformers and outperformers in the PE space. As such, it is important to note that the following analysis does not apply to any specific PE investment but rather to PE as an asset class in general.

The Perfect Asset Class?

PE allocations are broadly perceived as offering higher returns than their publicly traded counterparts. In addition, they are regarded as having lower volatility than and lower correlation to stocks. Given these perceived attributes, PE investments can be regarded as the “magic sauce” for increasing portfolio returns while lowering portfolio volatility. In combination, these attributes can significantly enhance portfolios’ risk-adjusted returns. However, the assumptions underlying these features are highly questionable.

Saturation, Lower Returns, & Echoes of Charlie Munger

It is reasonable to expect that average returns within the PE industry will be lower than in decades past. The number of active PE firms has increased more than fivefold, from just under two thousand in 2000 to over 9000 today. This impressive increase pales in comparison to growth in assets under management, which went from roughly $600 billion in 2000 to $7.6 trillion as of the end of 2022. It seems unlikely if not impossible that the number of attractive investment opportunities can keep pace with the dramatic increase in the amount of money chasing them.

Another reason to suspect that PE managers’ returns will be lower going forward is that their incentives and objectives have changed. The smaller PE industry of yesteryear was incentivized to deliver strong returns to maximize performance fees.  In contrast, today’s behemoth managers are motivated to maximize assets under management and management fees. The name of the game is to raise as much money as possible, invest it as quickly as possible, and begin raising money for the next fund. The objective is no longer to produce the best returns, but rather to deliver acceptable returns on the largest asset base possible. As the great Charlie Munger stated, “Show me the incentive and I’ll show you the outcome.”

There are no Bear Markets in Private Equity!

It is also likely that PE investments on average have both higher volatility and greater correlation to stocks than may appear. The values of public equities are determined by exchange-quoted prices every single day. In contrast, private assets are not marked to market daily. Not only do PE managers value their holdings infrequently, but they also must employ a significant degree of subjectivity in determining the value of their holdings. Importantly, there is an inherent bias for not adjusting private valuations when public equities suffer losses. Continue Reading…

Then and Now – Revisiting the need for bonds

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Image courtesy myownadvisor/Pexels

By Mark Seed, myownadvisor

Special to Financial Independence Hub

It has been said bonds make bad times better.

Is this the reason to own bonds?

Welcome to another Then and Now post, a continuation of my series where I revisit some older blogposts and either rip them to shreds (because my thinking has totally changed on such subjects) or I’ll confirm my position on various personal finance topics or specific stock and ETF investments.

Since my last Then and Now post (whereby I shared I sold out of all Johnson & Johnson (JNJ) stock to buy other equities in recent years), I figured it might be interesting to review this post and update my thinking from a few years ago before the pandemic hit – on bonds.

Then – on bonds

Back in 2015 when the original post was shared, I referenced this quote that frames my own portfolio management approach when it comes to my bias to owning stocks over bonds:

“If you want to make the most money, you should invest in stocks. But if you want to keep the money you made in stocks, you should invest in bonds.” – Paul Merriman.

Bonds are essentially parachutes when equity markets fall; bonds will cushion the portfolio landing. And equity markets can fail big at times!

While I understand there are different ways to measure the “equity risk premium,” the summary IMO is the same: the risk premium is the measure of the additional return that investors demand or expect for taking on a particular kind of risk, relative to some alternative.

Buy a bond and hold it until it matures and you know what you will get back.

Invest in equities and the range of outcomes is wide.

With equities, you could make a lot of money, but you could lose a lot.

Equities have to have a higher expected return to compensate investors for taking on this risk.

Otherwise, if the risk premium is not there – why bother with stocks at all?

Now – on bonds

That’s the rub these days, for many investors. Why invest in stocks when interest rates are higher and you can earn 4-5% essentially risk-free?

Of course, there is no way of knowing how equities or bonds will perform until returns for each happen. You can consider rebalancing your portfolio from time to time between stocks and bonds because you expect equities will do better longer-term but that doesn’t mean they will short-term.

Which brings me back to this: risk is the price of the entry ticket to buy and hold stocks. Continue Reading…