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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

April 9, 2018 | Get Balanced

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.

From their highs, before The Donald started a trade war and Mr. Dressup went to India, stock markets have shrunk. The Dow and S&P 500 are skinnier by about 8%. Bay Street has lost just under 7%. Daily volatility has increased dramatically and stock-only portfolios have been on a wild ride.

Real estate hasn’t been much of a better choice. Toronto houses are 14% cheaper than a year ago and almost 20% below their apex. Detacheds in some burbs are down 25%. New home prices have fallen by up to $120,000 with big builders like Mattamy. House sales volumes from Vancouver to Calgary, Winnipeg to the GTA and beyond are down sharply. The BC Politburo’s new suite of taxes looks ready to hammer prices and confidence there.

There are reasons not to put all your eggs in one basket. No asset class rises forever. Not houses. Not stocks. Nor do you have control over the things that make prices move, like central bankers, politicians, porn stars or extreme weather.

So love balance. It dampens risk. Tamps down volatility. Keeps emotion in check. Helps you sleep nights and still make money. The idea of a balanced portfolio is to protect you when things decline, yet grab growth when they rise. In 2008-9 a stock-only portfolio lost 55% and took seven years to recover. A balanced portfolio gave up 20% and recovered fully in a year – then advanced 17%. But that’s irrelevant. 2008 is not coming back.

Balance means just that – safe things and growth assets in the same portfolio. A mix of 40 (fixed income) and 60 (equity) is time-tested. You could do worse. But this must be combined with diversification. No individual stocks, but instead ETFs holding hundreds of them. Exposure to large, medium and small companies. A global focus – Canada, the US and international. Hedge against currencies, too, with a 20% US-dollar denomination. Mix in things like rate reset preferreds (to protect against rising rates) and some commercial real estate (in the form of REITs), and you can sleep even better. Especially during days like these.

So far this year the balanced portfolio has done what it’s supposed to – repel declines when financial markets fall. Despite central bankers raising rates (five times in the US, thrice here), stock markets surging and diving, the rise of US protectionism, the FBI raiding Trump’s lawyer and the return of inflation, this mix has retained virtually all of its 11% advance in 2017. The year before it gained 8%. The seven-year average is 7.0%, and two of those years (2011 and 2015) sucked on the markets.

Mistakes investors make are routine. They chase returns, buying what’s going up and shunning assets which just got cheaper. They confuse investing with gambling. They buy stocks based on heresay, intuition, their BIL’s hot tip or what some idiot said on the Internet. They put money into sexy stuff, like cryptos or weed, helping create doomed bubbles. They have a recency bias, making them believe what’s just happened will occur forever. (Just look at how everyone talked about real estate a year ago.) Amateur investors expect everything they own to gain in value at the same time, which is rare in a balanced, diversified portfolio. So they sell decliners and buy advancers, ratcheting up risk. They fail to rebalance and give no thought to the tax treatment of interest, dividends or capital gains within registered or cash accounts.

Costly mistakes. Avoid them.

Here’s the current thinking on balanced portfolio weightings, by the way: Cash, 2% (in a high-yield account). Global and Canadian sovereign bonds, 11%. Provincial bonds, 3%, Corporate and high-yield bonds, 9%. The preferreds (rate reset) clock in at 15%.

On the growth side, Canadian equity and dividend, 16%, real estate investment trusts, 5%, US large cap equity, 13%, US mid-cap, 3%, international 17% and emerging markets 6%. In recent months it made sense to take a little off the table in the US (obviously), while adding some to Canada (undervalued) and international (global growth is outstripping that of North America).

Of course, this works best if you have the right ETFs, allocate them properly for tax avoidance, rebalance as conditions require plus have a Bernese who can bring you a small keg of scotch when you do so. Liquidity matters, too.

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April 9th, 2018

Posted In: The Greater Fool

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