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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

April 27, 2016 | The crime

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

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Bob’s a cop in Metro. A detective, actually. Prides himself on being absolutely meticulous, ethical, researched, by-the-book. “Gut means nothing,” he once told me. “I follow the evidence.” You sound like a bad cop TV show, I said. Bob looked like he wanted to arrest me.

Anyway, when it comes to investing his gut wins. Two years ago he loaded up his and Cheryl’s non-registered account and a TFSA with a single stock. Apple. “These individuals will be changing the world as it is presently constituted,” he told me in cop-talk. “We will be there.” Despite a huge concentration risk in having a couple hundred grand in one stock, they did well, seeing shares rise from just under $100 to about $130. Sell, I said. Take your gain, diversify and retain a little if you want.

Bob refused. Two reasons. His fav stock was gonna travel to the sun making him rich, and second, there was no way he was going to pay capital gains tax on his 30% increase. “That’s a crime.”

Well, you know what happened. Apple peaked at $132, toppled into the 90s, regained some ground and yesterday was creamed for a 6% loss. In a single hour of trading, this company shed $43 billion in capitalization after a lousy earnings report and (worse) losing the faith of the markets. As great as the Apple guys are, they’ve apparently run out of juice. Smart phone sales have plunged, the iWatch is a toy and many people now believe the stock will turn into a doorstop  – a dividend-producing monolith no longer cool or spiritual. And no big shareholder profits.

But this is not about Apple. It’s about investing. Bob is now underwater by a buck or two. His 30% capital gain has disappeared and he’s gone two years without anything to show for it. Now he’s afraid to sell because he does not want to take any loss and deludes himself the stock will shoot higher. It’s a guy thing.

Holding individual securities is not investing. It’s gambling. On Wednesday, for example, while Apple was being chomped, the US market as a whole nudged higher. The exchange-traded fund called XSP, which owns the 500 biggest American companies, actually gained on the day while Apple investors were wailing. Once again being diversified was absolutely the best defence against unexpected events, like a falling fruit.

And while we’re talking portfolios, make sure you stay balanced, as well. As I’ve advocated, having a 40% weighting in safe fixed-income assets, and 60% in growth-oriented stuff (like XSP) is a sound long-term strategy. The fixed portion should be roughly half bonds (government, corporate and high-yield) and half preferreds. This will pay you an income stream (interest and dividends) of roughly 3.5% – which means the growth assets don’t need to work so hard to get you to an overall decent return.

Now some visitors moan about the ground preferred shares lost last year when the Bank of Canada dropped interest rates twice. Being rate-sensitive, they shed capital value even as they continued to churn out a nice 5% dividend. Naturally, 2015 and early 2016 were giant buying opportunities. The US Fed raised its rate in December and will do so twice more before the end of the year. Canadian five-year bond yields have doubled since the winter. And the price of preferreds has swollen by 15%. There is quite a bit more to come – plus the 5% dividend and the tax credit it brings.

You should maintain a fixed-income component to your portfolio because (as stated above) this is not about gambling. Rather investors should be looking to reduce volatility and motor along with annualized returns of 6-7% over the decades to come before the money is needed. Having bonds – even with low yields – means overall portfolio swings are minimized, along with your emotions. A 60/40 blend produced an average 6.3% over the last six years, two of which (2011, the US debt ceiling crisis and 2015, the oil collapse) sucked. As it turned out, Bob would have been far wiser to creep along with balance and diversification than to throw everything on the sexy single stock.

So where from here?

Things are definitely looking up. Oil has topped forty-five bucks for the first time in ages. The dollar has spiked to 79 cents US, the TSX has recorded gains so far this year double those of US markets, and young Justin will spend more money than you ever imagined over the next four years, pushing liquidity into the system, prompting the Bank of Canada to move next year and rewarding investors who stay the course. Donald Trump will lose. Global growth will stay positive. The US recovery – which created 2.5 million new jobs last year – will continue apace. Adele will hopefully have another baby and retire. It’s all good.

Investing is easy. Just don’t think you’re smarter than everyone else.

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April 27th, 2016

Posted In: The Greater Fool

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