Picking your own stocks vs. using an ETF or mutual fund – Which is a better choice?

Many advisers encourage the use of mutual and exchange traded funds over individual stock picking. In fact many actually discourage investors from buying stocks on their own.

There are many flaws to their argument as follows:

When the equity markets go down in a recession there is nowhere to hide if invested in a fund or ETF.

Owning individual stocks enables the investor to better control their overall portfolio volatility or risk. Proactively managing your investments through stock selection, asset mix and equity sector allocation can materially lower your level of risk. In the early stages of a recession this can mean increasing your weight in cash and reducing your exposure to more volatile equity sectors and higher beta stocks.

Conclusion

For many investors risk reduction is equally as important as absolute investment returns.

Have the cyclical stocks run their course? 

Many strategists believe that the cyclical stocks have finished with their strong price performance and are likely to have peaked.
Personally I do not believe this. Please take a look at the attached graph on the mining conglomerate, Rio Tinto and its share price  performance versus the S& P 500 Index. I have also included a valuation metric for Rio Tinto consisting of Enterprise Value / Trailing twelve month BBITDA.
The graph clearly shows in the recession of 2008-2009, Rio Tinto’s share price continued rising at the beginning of the recession , while the US equity market started going down at the same time. It was only after several months of being in the middle of the recession did Rio Tinto ‘s shares begin to decline.
Cyclical stocks tend to lag the overall market at the end of an economic cycle. In other words they do not go down initially as the benchmark index does.
Unless one believes that we are about to enter another economic recession over the next several months, which I clearly do not anticipate, cyclical stocks should continue to outperform the market. It is entirely possible that cyclical stocks may experience a 10-15% price correction after their recent strong performance, but any correction should be used as a buying opportunity to add to your current positions.
You can also see on the chart that Rio Tinto’s historical market valuation measured by its Enterprise Value / Trailing twelve month EBITDA is not currently trading at anywhere near the highest levels experienced over the last twenty years.
Recommendation
Do not be afraid to add to your holdings of cyclical stocks on any market corrections.

What value added does your investment adviser offer if they market weight all eleven equity sectors?

For those of you who have their capital managed by an external adviser, here are some red flags:

When you see your adviser market weight all equity sectors, this means that they have no clear vision as to where markets are headed. If your adviser simply has all eleven equity sectors with exactly the same percentage weight as the market, this clearly shows a lack of vision.

If you see your adviser doing this, ask them what value added they are providing over an index fund?

Recommendation

Do your own homework and obtain a second opinion on your investment holdings.

Province of Ontario is finally banning mutual fund deferred sales charges for all sales after June 1, 2022

Like the rest of Canada, Ontario has decided to ban mutual fund deferred sales charges effective June 1, 2022.

However any mutual funds that are sold prior to that date, will still be subject to deferred sales charges until they expire. Normally this takes up to seven years.

Recommendation:
Stop investing in any deferred sales charge mutual funds right now and immediately cease any monthly, quarterly or annual contributions.

May 8, 2021

Only investing in one or a few equity sectors that are outperforming the market is a recipe for disaster

Learn how to set up and actively manage an equity portfolio that encompasses all eleven sectors.

Thinking you are smarter than everyone else by only investing in sectors that are outperforming the market is a foolish strategy.

Equity sector rotation occurs much faster than you think.

Investing in stocks in out of favour sectors like Consumer Staples can still produce winners. Look at how well Empire A stock is doing.

I still firmly believe in assessing the outlook for each sector and having different percentage weights relative to the overall market.

But always have your eyes and ears open for attractively valued stocks with great prospects in out of favour groups.

Given the recent strong investment performance of the equity markets, do not stop your goal of managing your own capital

Based on my experiences with all types of investors over the years, those that use external money managers are reluctant to make any changes when their investment returns are strong. It is important to keep in mind your long term objectives – to lower the fees you are paying and ultimately improve your investment performance. If you can materially lower your fees this will immediately be beneficial to your net worth.

By taking ownership of your investments, you can effectively control how much portfolio volatility you are comfortable with and you can tailor your investments to match exactly your long term goals.

Why is Gold Bullion Falling?

Why is gold bullion falling when inflationary expectations are climbing?

There are several important reasons why gold prices are floundering today.

Nominal interest rates are rising sharply after having declined for many years. Gold bullion offers no income, so when rates rise investors are offered a yield- oriented alternative to gold.

Historically when real interest rates have turned negative, gold prices have risen sharply. Although real rates are still negative today, they are considerably less negative than they were at year end.

The US dollar has finally started to rise once again versus global currencies. This has normally been negative for gold.

Gold bullion is facing competition from bitcoin with many investors preferring its long- term outlook over gold.

Gold is not an industrial commodity like copper and steel. As a result of renewable energy and the electrification of cars, silver has also become much more of an industrial metal than gold.

As you can see from the attached chart, gold prices have performed well in a declining interest rate environment. As rates start to climb, gold prices begin to fall.

Conclusion

Unless inflationary expectations really start rising much faster than interest rates are increasing, gold prices will continue to face major headwinds.

Canadian Rate Reset Preferreds – Positive developments

You all know by now that I am not a favourite of rate reset preferreds. Extremely poor liquidity and rate reset risk when interest rates are low are major impediments from investing in them.

However, there have been some recent developments in regards to Canadian banks that have altered the preferred share market somewhat. Historically banks have been major issuers of rate reset preferreds as the capital raised could be included as Tier 1. The dividend on these preferreds was not considered interest and thus not deductible by the banks on their tax returns.

Recently, OSFI, the Canadian regulator, has granted approval for a new type of instrument called Limited Recourse Capital Notes (LRCN’S). These notes can be counted as additional Tier 1 capital. In addition while OSFI considers these notes permanent capital, the securities are considered bonds with the interest on them fully tax deductible by the banks. This deductibility of the interest makes them a cheaper way for banks to raise more capital.

Historically banks have been major issuers of rate reset preferreds. This new OSFI ruling is expected to create a potential shortage of new Canadian rate reset preferred issues, thereby lifting market valuations.

Secondly, there now exists a real possibility of many bank rate reset issues of being called and replaced by these new LRCN’S. This will also lift valuations. Fiera Capital expects up to $11 billion of redemptions over the next few years representing almost 17% of the overall preferred share market.

The LRCN’S will only be available to institutional investors as a new issue, but may still be available to retail investors in the secondary market. I assume that the distribution will not be eligible for the dividend tax credit as it is considered interest, but those details are quite hazy at this time. OSFI has not yet granted permission to Canadian non-financial companies to issue them. However these companies can currently issue a hybrid security instead of the preferred.

Recommendation

This recent news does not encourage me to go out and buy rate reset preferreds at this time. Interest rates remain low and are not expected to rise any time soon. However if you are a current holder of the bank issues, you may want to hold onto them for the possibility of being called at higher prices.

How to Invest Your monies in a Pandemic World

Equity markets initially collapsed, then subsequently rebounded sharply.The S& P 500 and TSX Composite are still off 16% and 19% respectively from their recent highs.

A global economic recession is clearly evident.

Many investors either have no cash or are virtually all in cash at this time. These are both bad long term strategies.

China has been vigilant in controlling this pandemic in their own country. Daily new cases and deaths in China are on the decline and have been for quite some time.

In the US and many other countries, the amount of daily cases has only seen a plateauing with no meaningful declines yet. Reopening the US economy, without a vaccine or effective anti-viral readily available, may well lead to a surge in new cases and deaths this fall according to Dr. Fauci, the head of the US Centre for Disease Control.

Consumer spending represents 70% of many domestic economies including the US and Canada. Unless the public feels completely safe, they are going to be very careful about travelling, staying in a hotel, shopping in bricks and mortar retail stores, attending a sporting event.

Specific industries are thriving in this Covid-19 era while others are really struggling and are unlikely to survive in the same form as was the case in the pre- Covid world.

For my Free Bloggers go to my home page to subscribe to my monthly newsletter and portfolios and read about how to invest your monies today. My May newsletter provides a summary of how to set up and manage an investment portfolio.

 

 

Canadian Equity Sector Performance – Insights for Future Performance

I have analyzed total returns for 1 year, year to date and 1 month.

Golds continue to be the best performing group outperforming all others for 1 year, year to date and 1 month.

Energy is the worst performing group for both the last year and year to date. However over the last month it has sharply outperformed the benchmark TSX Composite.

The Utility sector continues to outperform the TSX Composite on a 1 year, year to date and 1 month basis.

While the Industrials outperformed the TSX on a 1 year basis, they have under performed on a year to date and 1 month basis.

The Telcos – namely BCE, Telus and Rogers, have outperformed on a 1 year and year to date basis, but under performed on a 1 month basis.

The Grocers – Loblaw, Metro and Empire outperformed the TSX on a 1 year and year to date basis, but have not kept up to the TSX on a 1 month basis.

Lastly both the Reits and Financials outperformed the TSX on a 1 year basis, but have sharply under performed the TSX on both a year to date and 1 month basis.

Conclusion

Energy stocks are in the process of bottoming after the massive selloff.

Utility stocks continue to perform well and with their strong dividends they tend to outperform in a recession.

Golds are expected to continue their strong run as long as interest rates remain low.

Both Financials and Reits are suffering in this recession and this is likely to continue until signs of the recession ending are more evident.

There is some modest profit taking in some of the grocers over the last month after their strong performance. However they remain core holdings especially in a recession.

The telcos are similar to the grocers in that they are defensive in nature and will continue to perform well in a recessionary environment.

Industrials are quite cyclical in nature and are expected to perform better when this current recession ends.

 

Active stock picking and asset mix strategies are the best options in the current environment.

Stop buying passive index funds and etf’s in a falling equity market.

Improve the quality of your stock holdings by selecting companies with strong balance sheets and solid growth prospects. Sell your holdings in companies, funds and etf’s that do not meet this criteria. Be extremely selective in what you hold.

Active asset mix strategies work well in a volatile market where you have some cash available to take advantage of market opportunities on market dips.

 

 

Investment Asset Mix – Too Much or Too Little Cash – What to do now.

Having either too much cash or having too little cash by being fully invested both have different risks.

Many investors refused to see a possible market correction and remain fully invested in equities.The risk they face now is the possibility the equity market will retest its recent low and fall further from current levels. If you are fully invested in equities there is no place to hide.

There are two options you can pursue if are fully invested as follows:

Make some equity switches from poorer quality companies to better quality, less leveraged ones.

Take some profits in some stocks and equity sectors that have recently seen a nice market rebound.

 

For those of you with too much cash the risk is that you may have already missed the market bottom and this involves an opportunity cost.

There are several options you can follow if you have too much cash as follows:

You can gradually phase back into equities by purchasing high quality stocks that have come down in value recently.

You can systematically  invest a percentage of your assets back into equities – say 10-20% at a time.

Investing in a Bear Market

Cash is king – have plenty of it

Avoid Rate Reset Preferreds

Avoid High Yield Fixed Income

Both US Treasury  and Govt of Canada bonds perform well in a recession. However with current yields so low there is not much upside.

Avoid Equity Index funds and ETF’s

Favour defensive equity sectors like Reits, Utilities and Telcos

Gold bullion performs well when the following occurs:

Falling Interest rates like we have today

During most previous economic recessions, gold outperforms benchmark equity indices

When real interest rates are negative like today, gold performs well

 

Passive Index Funds vs. Active Management – Which is the best strategy in a bear market?

Passive indexing not a good strategy in a declining market

No place to hide in index funds

Active management sharply outperforms an index fund in a bear market due to the following:

Have more cash and invest in more defensive industries like Reits, Utilities and Telcos.

Individual stock selection weeds out poor performers and over leveraged ones

 

Algorithm based program selling triggers liquidation of both strong and weak sectors equally. However when markets rebound once again, defensive sectors and stocks tend to come back first.

Conclusion

Avoid passive index funds in a bear market

Active asset mix, stock and equity sector selection is the preferred strategy especially in a falling equity market