Tag Archives: risk
Posted By Stop trying to correct for market corrections — revisited
By Steve Lowrie
Special to the Financial Independence Hub
In 2015, I published an extended series of “financial stop-doing” posts, suggesting what investors could STOP doing, if they wanted to START building more durable wealth. Almost three years ago to the day – on September 8, 2015 – my “stop-doing” post began as follows:
“Recently, the market has been playing right into an important addition to our financial “STOP Doing” list: Stop trying to correct for market corrections.”
Time has passed, but one thing has remained the same: As current overall markets have again been ticking upward for quite a while, I’m again hearing investors fretting over when the fall will arrive, and whether they should try to get out ahead of it. Since my response remains the same today as it was then, I’ll reprint it for your re-viewing pleasure, updated to reflect the most current available data.
The subject is not a new one to us. In August 2014 and again in 2015, we posted this Q&A: “Is there going to be a market correction (and, if yes, then what)? In light of current events, we’ve now updated that post with current year-end information.
Just as it takes no special skill to predict some days of sub-zero temperatures this winter, we were not being prescient when we said that we would probably experience a correction sooner or later. One need only consider abundantly available evidence to recognize that, viewed seasonally, the market frequently “corrects” itself, sometimes dramatically. It’s only when we take the long view that we can see the market’s overall upward movement through the years.
For example, consider this Dimensional Fund Advisors slide depicting the US stock market’s gains and losses during the past 35 years. The narrow lines illustrate wide swings of maximum gains and losses in any given year. The blue bars show the year-end gains and losses after the dust has settled. Clearly, far more years ended up than down, for overall abundant growth.
This illustration is substantiated by similar findings from JP Morgan. According to their data, covering 1980–2017, the average intra-year decline of US stocks (measured by the S&P 500) was 13.8% per year, but the annual returns were positive more than 76 per cent of the time, in 29 out of those 38 years.
But first we’d like to challenge the word “correction.” We prefer to think of price volatility as simply part of doing business in the market to begin with. Ever the individual to tell it like it is, Dimensional Fund Advisor’s retired executive Dan Wheeler had this to say in one of his classic blog posts, “The Spinning ‘Talking Heads’”: Continue Reading…
Thinking about taking a flyer on cannabis stocks or blockchain? Follow these guidelines.
By Scott Ronalds
Special to the Financial Independence Hub
“I’m thinking of taking some money out of my portfolio with you guys to buy some shares in a blockchain-related start-up. Am I crazy?”
We were asked a question along these lines recently, and I suspect we’ll hear it again, whether it’s blockchain, bitcoin, cannabis, space tourism or whatever new investment opportunity seems exciting. Our answer might surprise you.
No, you’re not crazy. We don’t necessarily think it’s a bad thing to invest a portion of your portfolio in an unconventional, illiquid, or even highly speculative investment. You can learn a lot from it. We do have a few caveats, however. Most importantly, you need to have a high tolerance for risk and should be mentally prepared to lose everything you invest, because you just might. Below are a few other things to consider.
Limit it to 5% of your portfolio
Five per cent isn’t a magic number, but curbing a risky investment to 5% or less of your total portfolio will limit the damage if things go south. True, it will also limit your potential upside, but it’s a prudent trade-off. You don’t want to put your retirement plans and future standard of living at risk by investing too much of your portfolio in an adventure.
Have a plan
This seems obvious, but we find it’s often overlooked. Let’s use bitcoin as an example. Say you invest in the cryptocurrency when its value is $16,000. What will you do if it falls to $8,000? Or if it rises to $24,000? Do you have a floor and ceiling in mind for how much you’d be willing to lose or gain before making a difficult decision with your investment? Bitcoin is a great example of the hyper volatility that comes with speculative investments. You need to be prepared for it, and you need to have a plan.
Consider how it will change the risk profile of your portfolio
If your target breakdown between stocks and bonds is 60/40 and you want to carve off 5% to invest in a start-up, for example, you should be taking the money from the stock portion of your portfolio so that you don’t inadvertently increase your overall level of risk. If you’re venturing into investments that are higher up the risk spectrum, you shouldn’t fund them by cashing in your safer stuff (e.g. cash and bonds).
Further, if you hit the jackpot on a speculative investment, it will comprise a larger portion of your portfolio, which means you should think about reducing the level of risk in the rest of your accounts to keep your overall balance between growth and safety in check. On the other hand, if your investment tanks, your overall portfolio may have less exposure to growth assets than your plan calls for. In this case, it would be appropriate to increase your exposure to stocks. After a bad experience with a high-risk investment, this can be hard to do.
Read the fine print on fees and redemption clauses
If it’s a product or offering that you’re considering, rather than an individual security, be sure to do your homework on fees. Continue Reading…
The straight dope on Marijuana investing
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…
A snapshot of Canadian investors’ appetite for risk: Vanguard’s Canadian risk speedometers
Figure 1: Vanguard’s Canadian risk speedometers, September 30, 2017
By Todd Schlanger, Senior Investment Strategist, Vanguard Canada
(Sponsor Content)
As part of Financial Literacy Month in Canada, we are proud to announce the launch of Vanguard’s Canadian risk speedometers.
These speedometers were originally designed by my colleagues in the United States to provide a factual representation of how investor risk appetite is trending today, relative to the past.
In order to generate the speedometers, we calculated net cash as a percentage of total assets under management, (in this case, within the universe of Canadian mutual funds and ETFs) into high-risk and low-risk asset categories. We then looked at the relative cash flows into high- versus low-risk asset classes, relative to history.
The end result is a risk measure that can be tracked through time and displayed in a risk speedometer index, as shown in Figure 1 over the 1-, 3-, and 12-month periods ending September 30, 2017. When risk appetite is above its historical average — such as over the 12-month period — the needle is to the right of centre, indicating higher risk appetite. When the needle is to the left of centre, risk appetite is below average. In addition to the current risk appetite readings, we also display the prior 1-, 3-, and 12-month readings for comparison.
Notes: Vanguard’s risk speedometers measure the difference between net cash flows into higher-risk asset classes and lower-risk asset classes, in this case within the universe of Canadian mutual funds and ETFs. The lighter-shaded areas represent values that are within one standard deviation of the mean, which means they occur roughly 68.2% of the time (34.1% higher and 34.1% lower). The middle shades represent readings between one and two standard deviations from the mean, occurring 27.2% of the time (13.6% higher and 13.6% lower). The dark edges represent values more than two standard deviations from the mean, occurring the remaining 4.6% of the time (2.3% higher and 2.3% lower). Speedometer values for previous periods may change from what was initially reported as the current value in prior periods because of changes made in Morningstar, Inc., data, and to the updating of the five-year average.
Along with the risk speedometers, we will be providing underlying asset category details (the top winners and losers in each category) in terms of net cash flows and changes in assets under management that resulted in the current risk appetite readings, as shown in Figure 2 (for the same periods, ending September 30, 2017).
Figure 2: Highest net inflows and outflows Continue Reading…
