Tag Archives: diversification

Finance 101: How currency hedging affects your investment return

Posted By Financial Independence Hub | November 16, 2018

By Neville Joanes

(Sponsor Content)

If you invest overseas, your holdings may be valued in foreign currency. When markets are volatile, a portfolio manager can use currency hedging to protect the value of the investment.

Let’s look at how currency changes can affect how your money works. For instance, let’s say you book a vacation in Miami, Florida for your family. You’ll fly down from Toronto and enjoy some fun in the sun in the wintertime. You can relax while your kids cool off in the hotel swimming pool.

But between booking your reservation in the summer and actually paying your bill at the end of your stay in January, you notice that your costs jumped nearly 10 per cent – even though the bill in US dollars was the same as when you booked it months before! What gives?

If you had purchased US dollars at the time you booked and paid for your vacation with it, you’d be fine. But you used a credit card (like most folks), and had to pay the difference in the value of the currency. Now the vacation is over and you spent more than you intended.

A similar thing can happen with investments. Let’s see how it works.

Non-hedged vs. hedged investing: a simple example

Imagine a Canadian investor with diversified, international holdings. A few months ago, they bought some tech stocks that looked ready to go up. And lo and behold, they did! Their US tech company stock went up 8 per cent (measured in US dollars).

But there was another factor working against this investor: Canada! Surging oil prices powered the economy ahead at full speed. The Canadian dollar appreciated by an impressive 6 per cent against the US dollar!

What’s the result of this non-hedged investment? The investor’s US tech stock investment gives them a positive return of just 2 per cent. Not so impressive.

What would have happened if the investor hedged their investment? In that case, the investor gets the full 8 percent return!

See, hedging is like an insurance policy, when volatility is high. But here’s the catch: hedging is complicated. It’s time-consuming. You need high-level expertise and bandwidth to watch the market carefully.

For most Canadian investors, that’s not an option. It’s probably something you want to let your portfolio manager (like ours) take care of for you.

Hedging on an income stream to ensure steady returns. That’s how we do it

Let’s say there is an income stream from a dividend-paying investment, like in our bond and income-generating ETFs. That income stream is where we look to hedge the investment. Continue Reading…

The straight dope on Marijuana investing

Posted By Financial Independence Hub | September 17, 2018

By Chris Arthur

(Sponsor Content)

Is all the buzz around marijuana investing deserved? How did the value of marijuana stocks get so high in the first place? Why are they currently on a bit of a low? And with valuations at a discount, is now a good time to get in on the action?

Clearly, there are big risks. But there are also big rewards for investors in this fast-growing new industry. After all, marijuana legalization is scheduled to take place very soon.

Anyway, it seems inevitable at this point. How can you add marijuana to your investment mix? With Canadian investors in mind, we took an in-depth look at these questions.

Legalization isn’t as simple as when the House of Commons votes to create a new marketplace. Many politicians are enthusiastic. However, they know that there are many other considerations and costs involved. For those interested in marijuana investing, it’s top of mind.

The marijuana marketplace has grown up fast, even before legalization

When is the absolute best time to invest in the fast-growing marijuana industry? Actually, that was probably more than a year ago. Canada’s Prime Minister campaigned on legalizing marijuana in the last election. The thinking was to disrupt the black market. At the same time, while they could create a windfall of tax revenue and they’d get a substantial cash infusion from a legalized marijuana industry.

In response to the enthusiasm, investors poured money into cannabis companies. Some of these quickly went from penny stocks to high-flying billion-dollar firms.

For instance, the market cap of the top five cannabis stocks alone grew by 400%. Canopy Growth Corp., the leader in Canada, has a market cap of over $5 billion. If you got in early enough, you saw a 261% return on your investment. Aurora Cannabis had a slightly smaller market cap. However, it posted a 1-year return of 353%. PharmaCan Capital’s stock was up 385%.

The whole reason we saw such startling triple-digit returns for marijuana stocks year? Deregulation. Sooner or later, it’s coming.

A bigger market than just Canada

Marijuana legalization creates a global opportunity. It is not confined to the Canadian marketplace. However, it is a also a unique situation. The usual big gorilla on the block, corporate America, is a no-show. Consider legalization in individual American states like Colorado and California. There, federal law still cuts American companies out of the competition.

That means, for once, Canadians can step over their southern cousins and become global leaders in a brand-new industry. This is green pasture territory. It is a dreamy prospect for investors looking for profit.

The marijuana industry includes over 85 companies with a combined market value of $30 billion. Some believe the global medicinal marijuana marketplace alone could be worth US$31.4 billion by 2021. According to Eight Capital, it could be worth $180 billion by 2025. Some think Canadians might be coming late to this market. Medical cannabis programs started here as early as 2001. If anything, we set the trends.

However, the big growth we have seen so far isn’t likely to continue forever. Investors looking into this industry need to manage their expectations.

Today, marijuana investing is about diversification. After all, there’s volatility. You’re betting on companies that must prove their worth by generating sales. What kind of sales? That’s the billion-dollar question.

Not every marijuana start-up has all the answers. So, what are paying customers really looking for? That is still up for debate.

Overview: Where the marijuana industry is today

There are different kinds of potential customers for marijuana. The first, smaller group is the smokers. But the second group includes people who consume cannabis in other ways. After all, customers can do it through food, beverages, supplements or other means. Also, medical marijuana is a big potential area of growth. Additionally, there are specialty products that cross over into the bigger food and beverage territory.

According to Evolve ETFs’ research, in 2015, there were just five countries where medical marijuana was legalized (or in the process of being legalized). By 2017, that shot up to 25 countries.

Canada is a leader in this sector. It legalized medical marijuana in 1999. The big breakthrough though came in 2015. There were new rules to allow value-added products. The Supreme Court said restricting legal access to only dried products was unconstitutional. This opened up the market with new product lines. That in turn transformed the medical marijuana landscape.

The number of adult Canadians who use recreational marijuana could be about 20 per cent of the population. How do we know this? The government is trying to get a better handle on the actual number. It’s tracking the THC-laced product that winds up in our sewers. Canadians spent $5.7 billion on marijuana for medical and non-medical purposes in 2017. Market studies estimate the value of the Canadian recreational marijuana market in 2018 to be about $7.9 billion.

Beverages will likely be big business for the marijuana industry. Energy drinks and health supplements of every variety will separate themselves from the pack by infusing them with marijuana extracts. Some companies are planning cannabinoid-infused beverages for launch in 2018. These products have huge potential for sales.

It could be an easy way for companies outside the marijuana industry to get a foot in the door in this growing industry. Alcohol giant, Constellations Brands, owner of Corona, purchased a 9.9% stake in Canopy Growth Corp (WEED.TSX).

Risks in marijuana investing

There are still many questions around the legalization process. Uncertainty is sure to prompt additional volatility. Continue Reading…

Would you accept portfolio advice from William Shakespeare?

Posted By Adrian Mastracci | August 2, 2018

“In giving advice seek to help, not to please, your friend.” ― Solon, (638 BC–559 BC), Greek lawgiver & politician

You are probably wondering what on earth William Shakespeare, the highly renowned English poet and playwright, has to do with dispensing portfolio advice. After all, he was around more than four centuries ago. Let the short story unfold.

Investors think of portfolio management strategies as modern day creations. Particular emphasis is directed to findings of the last fifty years. This area of study is commonly referred to as “Modern Portfolio Theory,” or “MPT” for short.

For example, Benjamin Graham is considered the father of value investing. His bestseller book titled “Security Analysis,” co-authored in 1934 with David Dodd, is still a course staple at various business schools. As an aside, Warren Buffett was a student of Benjamin Graham.

Many investors focus their attention on books, magazines, newsletters, educational papers and blogs devoted to MPT issues. The internet, television, radio, print and social media outlets cater to an array of MPT needs. The list keeps growing daily by leaps and bounds.

Moreover, today’s investors and professionals have a wide assortments of MPT tools at their disposal. Virtually anyone can track, analyze, select, benchmark, monitor and implement every imaginable portfolio nuance. Conversely, it is very easy to become mired in MPT matters.

However, you may be surprised to discover that portfolio theory is far from modern. It does not have to be complex to be effective. Further, nobody needs to become overwhelmed in MPT.

In fact, portfolio theory sports a long and rich history, spanning centuries. Its fundamental pillars have remained much the same. Even though countless tweaks have been made over time.

Shakespeare’s insights

A while back, I revisited some plays that I had studied during my days of high school English classes. “The Merchant of Venice,” a comedy written over four centuries ago by William Shakespeare, (1564–1616), comes to mind.

I rediscovered one notable excerpt from that play. A concise and insightful situation. It ought to interest practically every investor who thinks long-term.

Let us turn the hands of time back to the days of Shakespeare and focus on the plight of Antonio, the Merchant of Venice. This passage was spoken early in Scene 1 of the play:

SALARINO:
But tell not me; I know, Antonio
Is sad to think upon his merchandise.

ANTONIO:
Believe me, no: I thank my fortune for it,
My ventures are not in one bottom trusted,
Nor to one place; nor is my whole estate
Upon the fortune of this present year:
Therefore my merchandise makes me not sad.

Stop right there. Read it once more. Were he living today, Shakespeare would make a shrewd portfolio manager. I would happily encourage him to become a member of our team. I would empower him to continue dispensing that same eloquent portfolio advice from his day.

Even four centuries ago, Shakespeare professed the sage benefits of diversification. Antonio’s portfolio had various ships, heading to several destinations, with different cargo and spread out over time. A high priority for portfolios continues to be the assessment of what is prudent and sufficient diversification for each case.

Shakespeare’s wisdom is classic, sensible advice for the nest egg. It is also logical and straightforward. Had the Nobel Prize existed in his day, Shakespeare would surely have been nominated for his portfolio insights. Plus, he had skills to blend portfolio strategy into his play.

Time tested practices

Classic investment practices from long ago point to considerable common sense. I highlight a few:

Shakespeare’s portfolio insights have truly survived the tests of time. Something all investors aspire for the nest egg, especially retirement. Keep your eyes firmly on the objectives you seek. Slow and steady gets you to the desired ballpark.
Refrain from reinventing the investment wheel. The more things change, the more they stay the same. The approach to your plan of action is not materially different today as compared to one from centuries past. You have access to far more options and added distractions.
Methodical and logical decisions are best. Spread long-term investing risks by diversifying broadly. Develop and follow a sensible asset mix. Park your emotions at the door. It is a simple and effective base to adopt.
His advice on diversification is core portfolio strategy. It helps achieve and sustain investing success while keeping complexity in check. As in Antonio’s day, it also reduces the chances of the nest egg making you sad.

My take is that present portfolios benefit from applying fundamentals developed in centuries past. Vintage portfolio theory, perhaps, but very modern in its early days. Your mission is to make sense of bumps, curves and potholes that develop along your chosen path.

The broadly diversified approach of yesteryear is still superb, timeless, invaluable advice for your MPT needs. Choose solid, yet simple, foundations that support your financial castle throughout the long journey.

I say accept the portfolio advice. Shakespeare would be proud.

Adrian Mastracci, Discretionary Portfolio Manager at Lycos Asset Management, started in the investment and financial advisory profession in 1972. started in the investment and financial advisory profession in 1972. He graduated with the Bachelor of Electrical Engineering from General Motors Institute in 1971, then attended the University of British Columbia, graduating with the MBA in 1972. This blog is republished here with permission from Adrian’s website, where it appeared on June 19, 2018.

Aman Raina’s 3-year review of his Robo Advisor portfolio

Posted By Financial Independence Hub | March 2, 2018

By Aman Raina, Sage Investors

Special to the Financial Independence Hub

PLEASE NOTE: This review was written in early February before the big correction started in the market.

I can’t believe it has been three years since I opened up my Robo Advisor account. For those new to investing, a Robo Advisor is a new wave of wealth management companies that invest on behalf of others using an online platform and a combination of algorithms and computer coding to identify and manage portfolios. About three years ago these firms were in their early days, but since then they have mushroomed and even traditional investment companies are now offering some flavor of online investment management services. It seemed quite appealing; however, there was one thing that many marketing materials, blogs, and mainstream media were avoiding (and still are I might add) … do these types of services make money for investors?

Three years ago I decided to try an experiment and find out for myself. I set up an account with one of the big Robo Adviser firms and invested $5,000 of my own money into it. My goal was to go through the process and blog about my experience and more importantly, the results. I said that we need a good five years to really get a handle on how effective these services are compared to traditional wealth management services. Well, we’ve now crossed the 3-year anniversary of my ROBO account, so let’s take a look at how it’s doing now. Continue Reading…

Regain portfolio control amid market mayhem

Posted By Adrian Mastracci | February 28, 2018

“To conquer fear is the beginning of wisdom.”
—Bertrand Russell (1872–1970), British philosopher

Investors have been enjoying the fruits of rising markets. A nine-year upside since the March 2009 lows, to be more precise. Conventional wisdom expected that stocks continue to deliver as economic conditions are likely to remain healthy.

Suddenly, everyone is wallowing in fears. Worries about global economies, recurring volatility and market jitters are back on stage. Investors are wondering what to do with the nest egg amid the crazy mayhem.

“Markets can’t be managed, so focus on your interaction with the markets.”

I recommend that you act wisely. Move slowly. Don’t give up. Don’t throw in your towels. The solution is simpler than you think.

Repeat after me: “I am not in control of my nest egg – the stock and bond markets are.” This is your first and most important admission.

Expect market corrections and surprises any time. Market mayhem is a normal occurrence, in both directions. You’ll be afforded little time, if any, to react. Fretting and worrying about the volatility does not help anyone. Your task is to regain as much control as possible.

Recent market haircuts are graphic reminders of the curve balls of investing. Zeroing in on simple practices reduces the hazards of stepping in a sink hole along your investing roadway.