Tag Archives: investing

Taylor’s golden rule of Stock Market size indices

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By Dr. Bryan Taylor, Chief Economist, Global Financial Data

Special to the Financial Independence Hub

Global Financial Data has collected extensive data on stocks from the United States and the United Kingdom covering over 400 years. With this, GFD has generated indices that cover the history of the stock market from the incorporation of the Dutch East India Company in 1602 to the current market in 2018-2019.

One question that the creation of size indices creates is how many components should be in the large-cap, mid-cap and small-cap indices. Where should large-cap, mid-cap and small-cap begin and end? Currently, each index company treats large-cap, mid-cap and small-cap indices differently. Let’s look at how different index companies treat market capitalization.

Standard and Poor’s has three size indices for the United States with 500 shares in the large cap index, 400 in the mid-cap and 600 in the small-cap. The 500-share index was introduced in 1957, the 400-share Midcap was introduced in 1981, and the Small Cap Index was introduced in 1994. The proper weights for the three size indices was not calculated when the indices were introduced, so the S&P 500 Composite represents 90% of total market capitalization, the Midcap 400 7% and the Small Cap 3%.

The idea for a small-cap index was introduced by Russell in 1987 and the data was extended back to 1978. Russell has 1000 stocks in their large cap index and 2000 in their small-cap index. However, this creates an even greater imbalance for the large cap stocks since the Russell 1000 represents about 92% of the total market cap in the United States and the Russell 2000 represents about 8%.

Morningstar and MSCI have more balanced approaches to the size categories. Morningstar refers to the top 70% of stocks as large-cap stocks, the next 20% as mid-caps and the bottom 10% as small-caps. MSCI divides the US stock market into 300 Large Cap stocks, 450 Midcap Stocks, 1750 Small Cap Stocks and the remaining stocks (around 1000) as Micro-cap stocks. By our calculations, this would give about 70% to the Large Cap 300, 16% to the Midcap 450, 13% to the Small Cap 1750 and 1% to the Micro-Cap 1000.

Taylor’s Golden Rule

The problem with creating long-term indices is that the number of stocks that listed on the exchanges and over-the-counter grew dramatically over time and the number of stocks in the large-cap, mid-cap and small-cap groups vary accordingly. During most of the 1800s, there weren’t even 500 stocks listed on all of the exchanges in the United States. So how do you determine how to allocate stocks to the large cap, midcap and small cap categories if the number of stocks in existence is constantly changing? Continue Reading…

Should you invest in pot stocks? How do you invest in the cannabis sector?

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The importance of diversification

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By Noah Solomon

Special to the Financial Independence Hub

Harry Markowitz, recipient of both the 1990 Nobel Memorial Prize in Economic Sciences and the 1989 John von Neumann Theory Prize, referred to diversification as “the only free lunch in finance.”

As most investors are aware, diversification is an essential element of any well-constructed portfolio. Diversification across different markets and individual securities can lower volatility, mitigate losses in declining markets and produce higher risk-adjusted returns over the long-term.

Easier said than done: the temptation to chase returns

Of course, during times when one asset class or country outperforms for an extended period, this can lead to feelings of regret. Looking in their rear-view mirrors, investors often wish that they had been less diversified and had an overweight position in the outperforming asset class. This regret can result in FOMO (fear of missing out), whereby investors pour capital into those areas of the markets which have been outperforming.

The U.S. stands alone

Since the post-financial crisis market bottom of March 2009, the U.S. stock market has dwarfed those of other markets in terms of performance. U.S. stocks have produced almost double the return of emerging markets stocks, which have been the second-best performer.

Country Annualized Return Cumulative Return
U.S. 15.1% 381%
Emerging Markets 7.5% 199%
Europe 6.9% 189%
U.K. 6.1% 176%
Japan 5.7% 170%
Canada 4.9% 157%

 

Sources: MSCI, Factset Research Systems

Unsurprisingly, the outperformance of U.S. stocks, reflected in the table below, indicates that the U.S. market currently stands as the most richly valued market as measured by its cyclically-adjusted Price/Earnings Ratio (CAPE).

Country Cyclically Adjusted P/E (CAPE)
U.S. 32.1
Japan 27.2
Canada 22.0
Europe 19.4
U.K. 16.9
Emerging Markets 16.4

 

Source: www.starcapital.de

Punished for doing the right thing

The spectacular outperformance of the U.S. stock market means that portfolios that have been heavily concentrated in U.S. stocks have generated considerably higher returns than their more diversified counterparts. In other words, investors who have sacrificed diversification in favour of being overweight U.S. stocks have been handsomely rewarded. Continue Reading…

Smart ways to divvy up your tax refund

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Situation: The income tax refund is a welcome sight for many taxpayers.

My View: Park it temporarily to reflect on its best use before allocating it.

Solution: Evaluate family needs and options that provide lasting benefits.

Income tax filing season is under way once again. Accordingly, I examine some smart ways to apply your tax refund. First, a little trivia:

For what year did Canadians last file a 1-page Federal income tax return?
It was the 1949 tax year.

I think of allocating the income tax refund loosely within these categories. For example, you can spend it, save it, invest it, reduce debt and help others.

Start by parking the refund into a saving account to resist impulse, say for 30 to 60 days. That provides you sufficient time to reflect and evaluate your needs and best options that apply.

Try your utmost to arrange lasting usefulness from this source of cash. Many of the allocations you will make are not reversible.

Everyone can reap benefits from these simple best practices. I summarize some sensible ideas in dealing with tax refunds:

Reduce debt

  • Repaying credit card balances are top notch, risk-free allocations.
  • Trimming a line of credit, mortgage or student loan is very desirable.

Invest it

  • Contributing to the RRSP boosts the retirement nest egg.
  • Adding to the TFSA generates tax-free investment income.

Help others

  • Donating to a charity of your choice is a noble cause.
  • Helping out someone less fortunate than you is generous.
  • Making RESP deposits helps pay the rising costs of education.
  • Funding the RDSP for a special needs family member is unselfish.
  • Lending it at the prescribed rate to the lower tax bracket spouse.
  • Assisting an adult child to purchase a vehicle or residence.

Save it

  • Leaving it in your saving account is a worthy choice.
  • Supplementing your family business capital is worthwhile.
  • Adding to your investment plan is productive strategy.
  • Improving your career or education fulfills goals and dreams.
  • Rebuilding the family emergency account is beneficial.
  • Setting funds aside for the next income tax instalment.

Spend it

  • Replacing an aging vehicle and appliance helps.

Investing in the Cannabis Market

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Five months into the legalized marijuana market, it’s a good time to remind ourselves of basic investment principles. Get good advice you trust.

 

By Kevin Greaves, MyResolver.ca

Special to the Financial Independence Hub

Perhaps not since the dot com boom of the 1990s have we seen the kind of investor interest in a sector that we’re now seeing in the marijuana market.  Seasoned investors and newcomers alike are excited by the prospects of this nascent market and risk is rampant.  In the months leading up to, and the four months following legalization in Canada, there has been huge volatility in stock prices for some of the major players and the valuations of many of these companies is often characterized as ‘out of whack’.   For instance, market leader Tilray (TSX:TLRY) was valued greater than American Airlines Group in September 2018.  That is high! (Pun intended)

So, if you’re looking to add marijuana stocks to your portfolio, there’s a lot to take in at the moment.  It’s not easy to keep on top of the news of mergers, partnerships, earnings reports and growth forecasts in an emerging sector, and you could find yourself caught up in the hype.  So first and foremost, it’s good to work with a trusted investment advisor.  An advisor can help to put disclosure documents in perspective and assist in choosing an investment that suits your financial goals. Even if you are an experienced investor, accustomed to doing your own research and trades, having an advisor to confirm or correct your strategies, even just initially, could help you avoid some costly mistakes.  There are plenty of articles on the value of an advisor, and how to find one, so that’s not a topic we will cover in depth here.

Investor or Speculator?

Warren Buffett’s mentor, Benjamin Graham believed it was crucial to determine whether you are acting in the market as an investor or a speculator.  The distinction is fairly simple.  As an investor, you buy a stock in a company you believe will be successful and that stock represents ownership in the company.  You have a stake in the future of that company.  As a speculator, your only concern is what someone will pay for that stock down the line.

Some would argue that all investment is a combination of the two but it’s an important differentiation to make when you are working with an emerging market sector.  It allows you to clarify your expectations and often, the timeline for your ROI and the amount of risk you are prepared to take.

It’s important to remember that marijuana is a commodity: plain and simple.  And as a commodity it is subject to the same booms and busts as other commodities.  As an agricultural commodity it holds additional risks.  Think of all the uncertainties of growing any crop:  the introduction of a single pest can wipe out an entire harvest.

Consider ancillary products and players

There are opportunities beyond investing in producers of marijuana and if you’re considering investing in this sector, you may want to look beyond the obvious.  Certainly, Biotech stocks have been around for decades but with more and more information available regarding the medical uses of cannabis, there will be expanded opportunities for companies to develop drugs and treatments for various diseases, conditions and illnesses.  For instance, creams and oils derived from CBD, the non-intoxicating compound of the marijuana and hemp plants, have shown great promise in the treatment of epilepsy and arthritis.
Continue Reading…