Tag Archives: risk

Challenging conventional investment wisdom

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By Noah Solomon

Special to the Financial Independence Hub

Many investment professionals tell their clients:

  • That markets tend to rise over the long-term.
  • To “hang in there” and “sit tight” during bear markets because they will eventually recover their losses.

While we agree with the first assertion, we wholeheartedly disagree that investors should sit idly through bear markets based on the notion that they will eventually live to see a better day. Rather, we strongly believe that a dynamic approach that adjusts to changing markets can provide superior long-term results.

The table below illustrates this by showing what happens to $1M invested in two different portfolios:

Portfolio A Portfolio B
Year 1 -30% -5%
Year 2 +30% +5%
Year 3 -30% -5%
Year 4 +30% +5%
Sum of returns 0% 0%
Value at end of year 4 $828,100 $995,006

 

Since the returns over four years add up to 0% for both portfolios, many people assume that the final value of each portfolio at the end of year 4 should be $1 million. However, as the last line in the table indicates, this is far from true.

Portfolio A, which is more volatile, declines in value by $171,900, while portfolio B, which is less volatile, suffers a decline of only $4,994.

The observation that two portfolios can have the same sum of returns over 4 years yet have significantly different values at the end of the period can be explained by the mechanics of compounding. After experiencing a 30% loss, a $1 million portfolio is worth only $700,000. Unfortunately, a subsequent 30% gain will only bring the value of the portfolio back to $910,000, which is still $90,000 less that its starting value. However, when a $1 million portfolio experiences a 5% loss, its value is $950,000, and a subsequent gain of 5% will bring its value up to $997,500, which is only $2,500 less than its starting point. Continue Reading…

Searching for yield without reaching for risk

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By Kevin Flanagan, WisdomTree Investments

Special to the Financial Independence Hub

What do almost all major global bond markets have in common thus far in 2019? You guessed it: lower rates. As a result, investors have returned to an environment that could be characterized as “yield challenged” and one that had become all too familiar before last year’s run-up in rates.

Typically, the search for yield comes with added risks as investors either move too far out in duration or lower their credit quality constraints. But what if an investor could enhance yield in their fixed income portfolio while maintaining familiar risk profiles?

Before we focus on a solution, let’s first garner some insights into the Canadian bond market. Similar to the situation south of the border, the Canadian rate outlook going into 2019 was not geared toward a lower rate setting. From a policy perspective, the Bank of Canada (BOC) was projected to continue on its rate hiking path. Prior to the December 2018 U.S. Federal Reserve meeting (the point when expectations began to reveal some change), the implied probability for a BOC rate hike by April was placed around 75% (for those interested, the figure for a rate cut was under 2%). Fast-forward to May 23, and the readings for a rate hike or cut by the end of October are almost split evenly at a little more than 20% each.

CAD 10-Year

CAD 10 Year

How about the Canadian government bond market? As the adjacent graph clearly illustrates, after the 10-Year yield peaked at 2.60% in early October last year, the trend to the downside has been unmistakable. Continue Reading…

If you must speculate in penny stocks, find those with these common characteristics

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Penny stocks do sometimes pay off, but there are many pitfalls to avoid. As you’ve heard us say often, a lot of penny stocks are little more than very well executed marketing campaigns.

Take a look at the penny stocks in your portfolio. If you’re a penny stock investor you likely have a number of them. The top 10 penny stocks in your portfolio should follow these guidelines:

Tips for analyzing your top 10 penny stocks

  • Look for strong management: Look for an experienced management team with a proven ability to develop and finance a mine, product or service.
  • Look for a strong balance sheet: High-quality penny stocks should have strong balance sheets with low debt. It’s even better if they have a major financing partner.
  • Look for well-financed companies: To profit in penny stocks, you should look for well-financed companies with no immediate need to sell shares at low prices, since that would dilute existing investors’ interests.
  • Look past the hype: Avoid stocks that are trading at unsustainably high prices as a result of broker hype or investor mania.
  • Look for stocks trading on a well-regulated exchange: We think you should avoid stocks trading “over-the-counter”, where such things as regulatory reporting are lax. Stick to penny stocks trading on regulated exchanges like the Toronto and New York stock exchanges.
  • Look for a results-focused company: Automatically rule out investing in companies that promote themselves too aggressively, or do so misleadingly. Success is more likely if the managers focus on developing a saleable product or service, rather than hyping their story.
  • Look for reasonable share prices: Compare the market caps (the total dollar value of all of a company’s outstanding shares) of the stocks with the estimated value of their assets or future earnings streams. Only a few penny stocks will successfully launch a product with enough success to justify the current share price and avoid collapse.

Your top 10 penny stocks will not be marketing ploys

Many penny stocks are little more than very well executed marketing campaigns. Your top 10 penny stocks won’t fall into this category. Many penny stock promoters will do anything in their power to get their penny stock noticed. These extensive marketing campaigns include emails, TV interviews, podcasts, newsletters and paid sponsorships.

There are also some so-called news sites that will sell sponsorships to penny stock promoters. These are great opportunities for penny stock promoters but bad for investors looking for an unbiased opinion on a stock. Continue Reading…

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

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Stop trying to correct for market corrections — revisited

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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…

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