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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

May 16, 2021 | The Yield

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.

Where, oh where, to invest?

As my fancy colleague Doug mentioned yesterday, when crazy genius rocket-Tesla dude Elon Musk called crypto Dogecoin a “a hustle’ on SNL last week, the coin plunged in value. Then Musk ratted on Bitcoin just months after inflating it. Tesla won’t be taking that fake-money as payment anymore he said, blaming the climate crisis. (To make one Bitcoin sucks off as much energy as Brockville burns in a week. Or is it a year?)

These are days when investing risk is large. Crypto, for example, is backed by nothing. “There’s no inherent value in it,” Jack Brennan said on the weekend. The guy’s no slouch, having run Vanguard’s $7 trillion in funds.

Real estate’s a landmine, too. The pandemic’s taken prices parabolic, wildly inflated household debt, critically damaged small town social and financial equilibrium while infecting a whole generation with debilitating FOMO. Soon the pandemic will end. Big changes ahead.

Meanwhile $20 trillion in government Covid stimulus money around the globe has swollen financial markets. Stocks in New York, for example, have hit two dozen record highs in 2021 – and it’s only May. Commodity prices, inflation and corporate profits have erupted, while CBs keep rates artificially low and snorfle up bonds.

Some people call it the ‘everything bubble’ which has merit. Nonetheless, this is the world in which we live. We all need money, incomes, savings, investments and a plan forward. Cash is a poor option with prices romping. Most people don’t have enough liquid assets to happily enjoy the rest of their lives. Not investing is not an option.

In my day job, when not posting dog pictures to a pathetic blog, it’s what I do. Here are the two goals I assume people have: (a) don’t lose money, and (b) give me a reasonable rate of return. Anyone sharing those goals should not buy crypto, mortgage their butt off buying a house at historic high level, or throw their money into four or five stocks. Instead, be balanced. Be diversified. Use the tax shelters you’ve been given. Stop paying ridiculous mutual fund fees. And don’t assume the last 14 months will change the entire future. They won’t. It’s fiction.

This brings us to the famous GreaterFool B&D Portfolio. No, we did not invent 60/40 investing, but in a stupid, virus-addled, overly-emotional world where governments make stuff up weekly and everybody’s now a vaccinologist, it’s needed more than ever. The idea is simple: invest not like a cowboy but instead for predictable, boring long-term returns. To do that you need safe assets as well as growth ones (balance) and a broad range of assets and locations (diversification). Not everything advances at the same time. Like one of those old pre-Elon eight-banger engines, some cylinders rise while others fall, and you keep moving ahead.

Where are we today? Simple. Rates are low and will rise. Economies are reopening. Governments are steeped in debt and will raise taxes. Houses and puppies are inflated and will moderate. Income disparity is soaring. Lefty politicians are challenging the right. Inflation and speculation are ramping up. Volatility lies ahead.

If there was ever a time for B&D, this be it. Here’s a summary of a portfolio strategy for the post-Covid world.

First, the safe stuff. This 40% of the portfolio is made up of cash (1%), bonds (26%) and preferreds (13%). Because rates will be rising and bonds lose value when that happens, hold bond ETFs containing short-duration debt or floating-rate assets, as well as a bit of government exposure. Remember bonds are not primarily held for income (they pay diddly) but for insurance, to protect you during times of flux – and there’s probably a lot ahead. When Covid hit, investors with balance were happy campers.

Preferreds, on the other hand, rise in capital value (if they’re the rate-reset variety) as the cost of money starts jacking up. Already happening. Plus they pay you to own them with a dividend in the 4-5% range, along with the dividend tax credit. So the 40% fixed-income portion of the portfolio overall yields about 3.25% – liquid, not locked up and therefore vastly superior to a GIC. Plus it protects you.

The growth side of the plan (60%) is equity-based, which means exposure to stock markets, plus commercial real estate. Use ETFs, of course, instead of trying to pick a few stocks – this greatly reduces the potential risk, especially if you listened to what your BIL told you to buy. Also don’t just load up on Canadian stuff, since home country bias is a fault. Having said that, Canada will likely benefit from the end of Covid, the reopening global economy and rising commodity prices. These days 20% (of the 60%) might be in maple – including a 5% weighting in REITs – with 22% in US and 18% in international equities. In larger portfolios, some of that will be in small-cap companies as well as the big stuff, along with a biotech exposure. Also remember it makes sense for Canadians to have 20-25% of a portfolio invested in US-denominated assets. Always.

How many positions to hold? Maybe 20. Fewer for smaller portfolios. And be conscious of putting assets in the right places (RRSPs, tax-free and non-reg accounts) for maximum tax efficiency.

Don’t trade every day. Or month. Rebalance once or twice a year when weightings get out of line. Don’t be seduced by headlines or social media nonsense. Ignore corrections. And don’t be consumed with fast growth. It’s not a race. Life is long, so setting up a proper portfolio then letting it run for decades is key. Risks include your own impatience, or fear of starting. If you need help, reach out for it. There’s more to life than money. But life without it is less.

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May 16th, 2021

Posted In: The Greater Fool

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