I broke the same investment rule again….

I once again broke my investing rule of trading only once per quarter (if at all). What to do when two rules conflict with each other? I tried to err on the side of lower risk. I re-balanced early as one asset class breached a target threshold.

More here.

Why I am not changing my portfolio even though the yield curve has inverted

On Friday it was reported that the yield curve in the US inverted for the first time since the last (great) recession. This is supposed to be a reliable harbinger for a future recession in 12-18 months.

What does it mean when the yield curve inverts?

It means the US short-term interest rate (as measured by the 3 month Treasury Bill rate) is now higher than the long-term interest rate (as measured by the 10 year Treasury Bill rate). An inversion like this is generally regarded as a negative market/economic sentiment that can affect economic and market behaviour.

The yield curve inversion has sent some scurrying to make changes to their portfolios by raising cash, selling riskier stocks and becoming more defensive (buying utilities, telcos, REITS and consumer staples equities).

Why I am not scurrying to do anything on the news:

  1. I already have some cash (about 10% of my portfolio, including high-interest savings and short-duration bonds maturing later this year)
  2. I already have good exposure to defensive equities: ~18% utilities + ~11% consumer defensive + ~6.5% communications services + ~3.5% real estate = ~39.0% defensive
  3. I have less than 50% of our total portfolio in equities so a market downturn should be offset somewhat by non-correlated holdings in fixed income, cash and bullion (this was true in 2018, when my portfolio returned ~+1% in spite of equity drawdowns in Canada and the US)
  4. If I sell something to raise cash there could be tax consequences in our non-registered accounts, due to potential capital gains being taxed
  5. I don’t know which non-defensive equities to sell to raise cash – I like all my holdings for the long haul or I wouldn’t own them
  6. Recessions tend to be short and I believe my long-term portfolio is structured well for riding out short-term events
  7. An inverted yield curve has reportedly accurately predicted upcoming recessions eight times (by some sources) since 1968 but, if on January 1, 1968, I bought and held the S&P 500 (^SPX) I would have made a return of 2.81K% in spite of the eight recessions (including the Great Recession of 2008-09)
  8. According to Forbes, the chance of a recession in the next year is always about 27% (based on their data pointing to 16 recessions since 1960) and today the chance is 30%, hardly more than average
  9. If the chance of recession is 30% next year there is also a 70% chance there won’t be a recession next year which means, based on probabilities alone, I should be buying risk-on stocks
  10. If the US Fed surprises by lowering interest rates, that could change the situation immediately
  11. I don’t know how to time when to start re-buying the risk-on equities I am supposed to sell now – presumably when the yield curve corrects to non-inversion

I am not saying a recession won’t happen in 2019-20. It may well.

What I am saying, as a long-term investor who buys, holds and monitors a portfolio of retirement assets designed for all markets, who relies primarily on asset allocation rules when making security weighting decisions, and who makes limited and selective trades intended to improve overall portfolio quality, I don’t react to news like this.

Do you?




Annual performance for my secular trends fantasy portfolio is now posted

I’ve posted the annual performance review for my secular trends fantasy portfolio which consists of nine ETFs representing thematic investment opportunities.

2018 was not kind to the portfolio (down around 10%) but cyber-security was a particular bright spot, up about 7%. More here.

More on sequence of returns risk

Sequence (of returns) risk is something I mentioned in my recent piece about my upcoming third quarter portfolio review. Sequence risk is a major factor in my planning as our household heads into retirement in the near future.

Looking at the current valuation of the S&P 500 vs. underlying gross national product is a bit sobering.

More on this here.

Brad’s updates to Steven Brown’s retirement forecaster tool are now available

Brad updated Steven Brown’s Retirement Forecaster Excel spreadsheet tool (version  2.7.2). The changes are as follows:

Version 2.7.2 provides support for defined benefit (DB) pension plans with a Bridge Benefit (such as the Fed Government or Ontario Teachers) and the accompanying DB Survivor pension. Detailed input instructions are provided on the Instructions sheet, under the Instructions section.

You may access the material on Brad’s page here.

Secular trends fantasy portfolio launch

I’ve launched a new fantasy portfolio on the money4retirement.ca website to track secular, or thematic trends for investors.

A secular trend is:

An investment trend associated with some characteristic or phenomenon that is not cyclical or seasonal but exists over a relatively long period.

The rationale for doing this and the initial portfolio structure is presented here.

The first secular trends fantasy portfolio tracking report (and its benchmark) is presented here.

I’ve also added a new menu option called “Secular trends and investing” on the site for quick access.

The decks from the April 2018 OSC meeting are posted

The decks from Mark Seed on DRIPping and from myself (Michael Patenaude) on the Q1 2018 OSC fantasy portfolios and sector allocations presented at the April 17, 2018 Ottawa Share Club meeting are posted here.

Be greedy when others are fearful?

Just a quick post to point out that for the third time so far this year, CNN’s fear and greed index is down below 10 (on a scale of 0 to 100). This suggests, by its seven measures, investors are “extremely fearful” of the US equity markets right now.

Hmmm. What’s on sale in the markets? (Hint: telecoms, consumer staples, energy, utilities and materials).

February 2018 content from the OSC meeting on retirement forecasting is posted

An extensive array of content is now available for planning your retirement courtesy of Fred May and Brad Forden who presented the material at the OSC session on February 13, 2018.

It includes Fred and Brad’s presentation, a link to Steven Brown’s Excel retirement forecasting tool, a link to Brad’s updates to Steven Brown’s tool, and four example forecasting scenarios that Fred and Brad presented at the meeting.

Please see the Ottawa Share Club members and guest page for the material (near top of the page) here.

Note: Brad is looking for feedback on the enhancements he’s made to Steven Brown’s forecasting tool. If you’d like him to work with you to do your retirement forecast and test the changes he’s made, please use the comments feature at the bottom of Brad’s page here and offer a paragraph description of what assistance you need. He is prepared to work with a couple of people only so please submit your request promptly.

Well, what really did happen to markets?

Further to my earlier post about some possible reasons for the recent correction in stock markets globally, I found a thoughtful explanation.

Ben Carlson of A Wealth of Common Sense, who I follow pretty regularly, posted his thoughts yesterday on his site.

Basically he thinks there isn’t a simple and satisfying explanation of causes for the pullback now.  He cautions investors that headlines tend to get blown out of proportion by financial news organizations.

He also makes the important point that anyone in the accumulation phase is now presented with an opportunity to buy good companies on sale.

Further, he predicts that this is not the beginning of a 2008-type crash. It is more likely a correction like we saw in the summer of 2015 (-12%) or the early part of 2016 (-13%).

Ben admits no one can predict what’s next:

The biggest thing to remember is that no one has a clue what’s going to happen next. Short-term market moves are controlled by human emotions, which are impossible to predict.

I couldn’t agree more.

That’s why I have done nothing during the correction and will monitor asset allocations until March 2018, when I reach my next self-imposed trading date. If stocks are still off their highs I may need to add to positions to remain at target weighting.

What just happened to markets?

Headline stories about the stock market pullback this week were largely focussed on the drop in the Dow Jones Industrial Average (less so on other indexes, but they were not immune). The year-to-date total return marked by the DJIA on January 26 was +7.77%. By the close on Friday, the DJIA had settled to +3.34% YTD, a drop of around 4%.

This is a relatively large drop given the low volatility and upward trending we’ve seen in markets in the last couple of years. By historical standards this is a mere blip, and 3.34% YTD total return still represents, annualized, over 35% growth!

I was in my car last night and caught a story on the news radio about the stock market pullback. The commentator didn’t really have a very clear rationale for drop – something about markets and the broad economy not being correlated….. The broad US economy is doing well, creating jobs and growing, but markets took a big pause.  Hmmm. I didn’t find that very satisfying.

A few minutes earlier I had read in WaPo the main reason that markets pulled back, and especially on Friday, was to do with the 10 year benchmark interest rate surpassing 2.8%, on its way perhaps to 3%. The case was made that a 3% benchmark rate will send a signal to some investors that bonds might be more attractive than stocks on a risk-adjusted basis.

I read another article this morning in the NY Times that makes a similar point and goes on to say there may actually be a connection between the pullback and the broad economy: expectations are that the broad US economy is going to grow at, say, 1.5% not the 3% promised by Donald Trump.

So maybe there is a decent connection between stock market indexes and the broader economy after all. Given how expectations affect spending and investment decisions so heavily – both in markets and in the economy at large – this really shouldn’t be a surprise. And the 10-year interest rate moves in large part due to expectations about inflation rates and the cost of money in the future. Inflation expectations may be climbing.

This tells me, perhaps, that expectations could well be shifting to lower future growth rates in the economy and to lower investment returns from markets. Nothing says these expectations will be proven correct, but it is worth noting.

It is also worth reminding that last year’s market performance is no guarantee of future performance. But even at a 3.34% total return YTD, the DOW isn’t exactly off to a bad start.

Jan’s research on ETFs for robotics, artificial intelligence and other disruptive technologies

After the last Share Club meeting featuring the topic of driverless cars, Jan, a Share Club Exec, has kindly provided his research into ETFs following robotics and artificial intelligence and other disruptive technologies.

His material is posted here on his Ottawa Share Club member page.

Don’t forget, much more OSC member and guest content is available here.


My article on investing in the water secular trend – now available for free

With permission from Canadian MoneySaver, I am happy to provide a free copy of my article on investing in the water secular trend that was published in June 2017.

The article explores the long-term trend in water-related businesses and some investment opportunities and risks.

Here is my article: Water_Patenaude

Here comes the US debt ceiling again, and the possibility of a government shutdown

I have mentioned a white swan event here before. But it was avoided for the time being.

We may see one or more again.

December 2017 will be a busy month legislatively for the US federal government. Along with tax cut legislation, Congress and the president must deal with the debt ceiling and the possibility of a government shutdown due to lack of funds.

December 8 is an important date to resolve the funding issues. The end of the year is the president’s imposed deadline for tax cut legislation.

Failure on any of these major initiatives will be embarrassing at best and potentially be very damaging to the US economy and market confidence at worst.

US markets are near or at all time highs and volatility is very low.

One could argue market sentiment is a bit too complacent right now.

If stocks go down, what’s your plan?

My thoughts from early 2016, when markets were pretty soft are here. While early 2016’s pullback seems like a long time ago, my perspective hasn’t changed all that much since.

Has yours?


Dotard vs. Rocket Man: Do the markets even care?

There has been lots of media coverage about the war of words between Trump and Kim (of North Korea). If a war does break out, some speculate as many as 25 million people could be casualties.

Do the markets even care? It would appear not so much, as new highs are being reached in the US. Asian markets are a bit more restrained.

If you are curious about the impact of wars on financial markets, 5i Research published a link from the CFA Institute that helps explain the historical response here.

In short, sad to say, a war between the US and North Korea might present a buying opportunity for stocks if they pull back short term.

The white swan swims upstream – for now

Not long ago I wrote a post about a possible “white swan” event. It was in reference to the risk that the US could have trouble raising its debt ceiling by the end of September.

The surprising deal between Trump, Democrats and presumably some moderate Republicans has pushed the risk out by three months.

For now, that is good news for markets.

There is even a movement afoot to eliminate the debt ceiling as we know it today, thus ending the recurring brinkmanship over raising it.

That too could be good for markets.

So, we’ll see if the white swan returns in December.

Ben Carlson of “A Wealth of Common Sense” thinks Canadian house prices are in a bubble

I was intrigued today when I saw a blog post by Ben Carlson (someone I follow and respect) from yesterday about Canadian real estate prices.

In his post he references an article he wrote for Bloomberg in June called: Canada’s Housing Bubble Will Burst.

His central evidence is that since the sub-prime mortgage fiasco blew up in the US in 2006, Canadian house prices have climbed 56%, while US prices have not yet recovered to their 2006 levels (still down 13% from their peak).

Let’s unpack this a bit:

  • Average Canadian residential real estate prices are disproportionately influenced by the Vancouver and Toronto markets, which have both posted major increases between 2006 and 2016
  • Down payments are generally much higher in Canada than they were in the US pre-2006 – we generally don’t have NINJA (no income, no job or assets) loans like those commonly available in the US at the time
  • The Canadian real estate finance market is much more tightly regulated and supervised than the US’s was in 2006
  • Most (all?) of the housing-related debt has not been collateralized and sold off to unsuspecting investors as toxic, sub-prime loans masquerading as high quality debt
  • The bubble in Canadian real estate, to the extent it exists, is largely confined to greater Toronto and Vancouver, and both markets have shown some signs of cooling in the last year since governments intervened with new taxes on foreign investment
  • An increase of 56% in average Canadian residential real estate prices from 2006 to 2016 represents an annual compounded increase of 4.55% per year (well above inflation, but hardly off the charts)

Due to some of the major differences in the Canadian and US residential real estate markets, I find it to be a somewhat irrelevant comparison to say: On a real basis, Canadian housing prices experienced a much smaller, shorter decrease in prices during the financial crisis and a much larger, longer increase in prices during the recovery.

There is no doubt that some real estate markets in Canada are very, very expensive, especially relative to incomes and consumer debt levels (something Ben Carlson points out too).

Caution is absolutely warranted!

But some commentators have been calling for the Canadian real estate bubble to burst for many years. Some investors and short-sellers have been shorting Canadian banks and alternative lenders like Home Capital Group in anticipation.

Specifically in the case of Home Capital Group, Warren Buffet begged to differ.

I am not saying a crash is not possible, but it seems to me, especially outside of greater Vancouver and Toronto, a milder correction or even just a slowdown is more likely.

With respect to Ben Carlson, I think saying no one knows when insanity like this will come to an end is a bit overstated.

I could be wrong though and prudence is always wise.





Markets (and maybe some companies) are amoral

One thing I think is becoming patently clear these days is that markets are amoral (who knew?).

I choose that term carefully: markets are unconcerned with the rightness or wrongness of something.

When Donald Trump was elected president of the USA, major US market indexes moved forward in a highly positive manner (the “Trump Bump”).


The promise of deregulation, tax cuts and infrastructure spending (not so much ripping up trade agreements) are bullish for profits.

Markets don’t care about what Trump stands for (or if he stands for anything at all for that matter) as long as the perception is he and the Republican Congressional majority will deliver the goods.

Now that Trump appears to be lurching from one political crisis to another (Mueller investigation, failed health care repeal/replace, North Korea, Charlottesville, etc.) markets still don’t care. As long as there is a belief that deregulation, tax cuts and infrastructure spending are on the way, politics don’t appear to matter.

Major business CEOs (including Merck, Under Armour, Intel, 3M, Campbell Soup, United Technologies and Johnson & Johnson) began defecting en masse from two of Trump’s business councils due to his public remarks about events in Charlottesville since last Saturday. Today these councils were disbanded (or, perhaps disbanded themselves).

Some or all of the business leaders may have opted out for moral reasons (the prevailing reason offered). These business leaders do not want themselves and their companies to be associated, in their customers’, shareholders’ and employees’ eyes, with the increasingly widely-derided “equivalence thesis” advanced by the president about violence in Charlottesville.

Maybe many businesses are also somewhat amoral. The CEOs on these councils, and the shareholders they represent in their businesses, generally have a profit motive as their primary (but not exclusive) reason for existence.

Do these defections also suggest some of these business leaders have lost confidence that Donald Trump and his Republican Congressional majority will deliver all the promised deregulation, tax cuts and infrastructure spending?

If some of the biggest US businesses have lost confidence and concluded their profits (and reputations) may suffer under Donald Trump’s presidency at this time, what does that mean for markets?

We’ll see as this drama continues to unfold Stateside.


Gradually “evolving” our retirement portfolio towards the distribution stage – my initial thoughts

I have posted my first-ever analysis about how to “evolve” our retirement portfolio away from the accumulation phase to the distribution phase. There are a surprising number of considerations!

More here.

A coming “white swan” event?

Is there a white swan event on the horizon?

A black swan event, a term coined by Nassim Nicholas Taleb, is essentially negative and unpredictable.

A white swan event is the opposite: a predictable event that will have negative consequences.

According the the Financial Times, last week a bout of nerves”  was injected into financial markets “as investors confronted the possibility of a disorderly stand-off over the US’s public debt limit.”

The Washington Post reports there are two kinds of Republicans: “those who think that the full faith and credit of the United States can be the subject of political experimentation, and sensible ones.” It is unclear which type will prevail in the remaining 12 working days left to resolve this political issue.

And in fairness, it is unclear how the Democrats will behave in their presumed negotiations.

The US’s public debt limit ($20 trillion) has already expired. Extraordinary measures by the Treasury Department are delaying the day of reckoning (where the US government becomes unable to meet all of its debt obligations). That day is September 29 of this year where some bills will go unpaid and a shutdown of government services will begin.

It’s not the first time this “abyss” has been reached but given the current political backdrop in the US, this time really could be different.

The Financial Times quotes Mark Zandi, chief economist at Moody’s Analytics: “This is an administration that has shown it can’t get anything done. Absolutely nothing.”

While anything can happen between now and the 29th of September, there is reason to expect more volatility in markets. If a worst-case, and hopefully highly unlikely scenario of default unfolded, it would be reasonable to assume a white swan event globally would ensue.

Certainly this is something for all investors to be watching closely for the next few weeks. Although, according to CNN Money’s “Fear and Greed Index” as of today, investors are blithely living in “greed” mode.



Six ways to invest in technological secular trends

I am a bit of a advocate for investing in secular, or long-term, market trends as a portion of a balanced portfolio. As many of you know I’ve written about e-commerce and water for Canadian Moneysaver, and have submitted an article on robotics for hopefully September publication.

I read an article today about six ways to invest in technology-driven trends (some of which may be secular). The six ETFs mentioned in the article are all American (not surprisingly given the size of the US economy and the amount of innovation taking place there). Here they are:

  • Robo Global Robotics ETF – ROBO (one of the topics in my upcoming article)
  • Emerging Markets E-Commerce ETF – EMQQ (mentioned here on money4retirement.ca recently)
  • Pure Funds Mobile Payments ETF – IPAY
  • Powershares Nasdaq Internet Portfolio – PNQI (mentioned in my e-commerce article now available for free)
  • Pure Funds Cyber Security ETF – HACK
  • SPDR Biotech ETF – XBI

One thing I learned about XBI is that it is equal weight with its holdings as opposed to IBB which is much more concentrated on certain companies (I own IBB, and this gives me pause to consider switching to XBI).

The full article is here.

Disclosure: I/we own shares in ROBO and IBB.


Reasons why DIY investors might avoid seeking and paying for investment advice

In a recent discussion with a friend and colleague, we were trying to understand why do-it-yourself investors might not take advantage of low cost advice to help improve their investment performance.

Of course there are many different investors out there with many different approaches to investing. We do encounter quite a few who are do-it-yourself, or seeking to be DIY, or simply seeking to be better informed, or maybe even just seeking the next hot investment idea.

I put together a list (below) of all the reasons I could think of as to why a DIY investor might not pay for low cost but potentially highly valuable advice.

Here is my list of reasons why investors may not seek and pay for advice:

  • the investor is actually satisfied with the advice they currently get and see no need for more
  • the investor only manages a small portion of their portfolio – the rest is managed by a professional so why pay for advice on the “fun money”
  • the investor actually doesn’t manage any of their own portfolio and is afraid take on a more active role in their financial future (even if the advice they get from their advisor is not satisfactory)
  • the investor feels a loyalty (earned or imagined) to their existing advisor and doesn’t want to pay anyone else on top of that and have to potentially deal with breaking a relationship with their existing advisor
  • the investor uses a professional and mirrors much of what the pro does in the self-managed part of her/his portfolio at lower cost
  • the investor is an expert or professional in another field and sees no reason why they cannot also be an expert or equivalent to a professional in the investment field (rightly or wrongly)
  • the investor has a big ego, or believes he/she has a market-beating system already, and thinks advice won’t help them because they’ve got it figured out already (rightly or wrongly)
  • the investor is lost at sea, so much so he/she doesn’t even realize how badly help is needed
  • the investor has a method for investing that focuses on a different timeline or approach than that of an advisor or advisory service (e.g., trading short-term vs. investing long-term; technicals vs. fundamentals; seasonal vs. value, active vs. passive, etc.)
  • the investor, by the very nature of being “self-directed” or “DIY” avoids costs of all kinds with a vengeance and seeks out information for free all the time – even if in reality it is costing them a lot in terms of missed opportunities
  • the investor’s portfolio isn’t actually that big or important to them (maybe it’s more of a hobby) because they already have a pension or other source of income that takes care of most or all of their financial needs – therefore she/he has no perceived need to spend money on advice
  • the investor suffers from lack of experience, and does not realize how a well-timed and relevant piece of advice could easily pay for an entire advisory service for a long period of time
  • the investor, similar to the previous point, does not understand how to place a value on advice, and therefore does not want to spend money on it in case they are overpaying
  • the investor believes there is already sufficient free information available to them through networks, forums, blogs, libraries, etc. and sees no reason to pay for advice
  • the investor actually feels ripped off by advisors, doesn’t trust them, and makes a point of not using them nor paying for them
  • the investor has received paid advice previously that didn’t work out exactly as expected, so they gave up on advice
  • the investor is deceiving them-self into believing there is a “golden goose” or “home run” out there if only they can find it – anything else is not what they are looking for
  • the investor is not actually an investor; he/she is a gambler and gamblers are motivated by other things than reasoned advice and decisions
  • the investor is pretty passive and goes with a “couch potato” approach that simply involves re-balancing and does not feel the need for advice
  • the investor actually has a pretty good idea what they are doing and prefers to access multiple sources of information, including books on investing, mostly or always for free

This list does not contain necessarily mutually exclusive ideas and more than one item may apply to a single investor.

Can you think of any other reasons why a DIY investor may not want to pay for advice? Leave a comment below if you wish.

My article on investing in the E-commerce secular trend – now available for free

With permission from Canadian MoneySaver, I am happy to provide a free copy of my article on E-commerce that was published in February 2017.

The article explores the growth trend in E-commerce and some investment opportunities and risks.

Here is my article: E-Commerce_Patenaude

Since writing it, another ETF has come to my attention that might be worth further research by investors (note this is not an endorsement of any kind): Emerging Markets Internet & Ecommerce ETF (EMQQ).

According to YCharts, the fund is up 44% year-to-date and has $104M US in assets under management, an average of 128,000 shares trading per month (a bit small), and an expense ratio of 0.86% (a bit high). There is an article about EMQQ here.

(Note that I also wrote an article on the water/water scarcity secular theme that was published in Canadian MoneySaver in June 2017. My next article will be on robotics and automation, hopefully published in the August or September timeframe.)

Share of global growth forecasts – Canada claims 8th spot

I saw an interesting infographic today that depicts where the world’s $75T global economy, expected to grow by $6.5T over the next three years, is likely to take place. This graphic provides a macro perspective on which economies will contribute to global growth.

China is #1, followed by the US. Canada is 8th, surpassing the UK, Japan, Brazil, Turkey, Mexico, Russia and Iran.

See the chart here on Visual Capitalist.