Category: personal portfolio strategies

I broke one of my own investment management rules….

I have to make a confession. I broke one of my investment rules. I traded in May instead of in June when I normally would.

I typically trade only quarterly, but this time was different. I only lasted two months.

What was the trigger? One of our stocks has been soaring past single-holding thresholds lately and I thought I’d like to re-balance on a high note.

Find out 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?

 

 

 

My annual portfolio review and updated household investment plan are now posted

I’ve posted my annual portfolio review as well as an updated version of my household investment plan.

My annual review shows a small gain in our portfolio for 2018, well ahead of major North American indexes. More here.

The updates to my household investment plan feature continued focus on sequence of returns risk and asset allocations based on “buckets” along with a reduction in our target portfolio performance going forward as we start to glide into retirement. 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.

Previewing my next quarterly household portfolio review

September brings my next quarterly portfolio review and my next, self-imposed, securities trading window (I only trade four times a year). I have been giving a fair bit of thought this summer to what’s next for our portfolio.

Here’s a preview of my thinking….

 

 

 

 

 

My Q2 2018 portfolio review has been published

I’ve published my second quarter of 2018 portfolio review. In it I discuss my current take on managing our household portfolio, some of the trades I’ve recently made and my thoughts for the rest of the year.

See my review here.

Breaking my own asset allocation rules

I have a confession to make. I have broken my own asset allocation rules with my second quarter trades.

I bought more equities even though I was already a bit overweight in them.

Why did I do this?

My reasoning is as follows:

  • I have a relatively low target equity weight to begin with (46% of our portfolio)
  • I had a lot of cash on hand (way over 10% of our portfolio)
  • I have more cash becoming available due to savings, bond maturities, dividends and interest in the next 12 months or less
  • quite a bit of that cash was in our TFSAs and I wanted to get that money working at better than than bond returns since the returns are tax free
  • bond yields are still not that attractive in spite of rising rates (~3.1% yield-to-maturity on a five-year investment grade corporate bond)
  • there are a lot of relatively good deals in consumer staples, utilities and telecommunications right now – several companies are off their highs and are trading at reasonable multiples
  • these three sectors are pretty defensive and could do OK in a recessionary environment
  • I only bought high quality equities with relatively low risk and often decent dividends (with one or two exceptions)
  • I did not add any new positions, just added to our existing holdings to increase their position size to something more in line with our average position size
  • Next quarter is another opportunity to review our portfolio and decide if we should trim some of the big gainers, especially in technology, which are starting to become more dominant single positions in our holdings

What I bought (all in our TFSAs):

  • Algonquin Power (AQN) – initially bought in my Canadian TFSA and journalled to my US TFSA to get the dividend that is paid in US dollars without conversion back to Canadian dollars
  • Bell Canada Enterprises (BCE)
  • Fortis (FTS)
  • Loblaw (L) – has a relatively low dividend
  • ONEX (ONEX) – this is an exception as it is a growth stock with a very small dividend in the multi-sector holdings industry
  • North West Co (NWC)
  • Telus (T)

I also bought some bonds:

  • CALLOWAY-I 3.985% 30MY23
  • FAIRFAX FINL 4.5% 22MR23
  • CANADIAN WESTERN BANK Maturity Jun 16 2022 Coupon 2.737

So, after this investment “spree,” our weightings vs. targets are as follows:

Asset Type Planned Actual Variance
Equities 46.0% 51.9% 5.9%
Bonds 36.0% 29.6% -6.4%
Bullion 9.0% 9.1% 0.1%
Total Cash/Near Cash 9.0% 9.4% 0.4%
TOTAL 100.0% 100.0%

All in all, we’re still in a pretty conservative posture and continue to have flexibility with cash levels if needed.

More to come in early July when I publish my Q2 portfolio review.

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.

My 2018 first quarter portfolio review is now published

I’ve completed my first quarter portfolio review.

Quite a difference from last year so far. Our household portfolio is flat so far this year. That’s a bit better than some of the major indexes, but not all.

I have a link in my review to some evidence that markets in the US might be soft until the mid-terms, and then could rebound a lot. So hopefully things will improve as the year progresses.

Find out more here.

My trades made March 2018

I had some unexpected time available today to make my first quarter trades (normally made on the 15th of the month, so a day early).

I previously posted some considerations I had in mind for this cycle, and received some helpful feedback in reply to that earlier post (thank you FletcherLynd!). I also posted a related question to 5i Research. (All the feedback and discussion is contained in the replies to my earlier post if you wish to follow along.)

So, in the end I did the following to take advantage of utility stocks for sale at a relative market discount and to address some major holes in our bond ladder:

  • Sold Valener (TSX:VNR) and bought, with the proceeds and a small top-up to a full position, Algonquin Power (TSX:AQN) – this trade is intended to improve the quality of my utility holdings (I still like VNR but I like the total return prospects of AQN better)*
  • Topped up Fortis (TSX:FTS) and Brookfield Renewables (TSX:BEP.UN) to bring them to full positions
  • Journalled the new BEP.UN shares from a Canadian dollar account to a US dollar acount (BEP) to capture dividends in US dollars without incurring currency conversion rates (this will occur on settlement March 16) – I bought in a Canadian dollar account because I didn’t have enough US cash in the account to make the purchase directly in the US account
  • Bought about 25% of my required bond purchases for the year, going short duration to fill holes in my investment grade ladder and in anticipation of higher rates later in the year (I will buy slightly longer duration bonds in June, September and December):
    • FORD CREDIT CANADA LTD SR UNSECURED Maturity Jun 22 2022 Coupon 2.766 for a yield-to-maturity of 2.9%
    • FAIRFAX FINL 6.4% 25MY21 for a yield-to-maturity of 2.84%

The net result is I’ve gone a bit overweight equities (I was slightly over-allocated already before trading). I sit at 49.5% versus 46% target, in part because equities, in spite of the correction last month, are still surging in my portfolio (tracking 17.3% on an annualized basis so far this year).

I’ll keep an eye on equity allocations as the year progresses and may trim a bit in technology if current trends persist. New cash should also help offset this imbalance a bit.

I will be doing my quarterly review at the end of the month and will post it along with my previous reviews here.

*Full disclosure – I’ve been a bit erratic with Valener. I bought it in September 2017 (just six months ago) as a long-term holding. At the time I wanted to buy Algonquin Power but thought it was too expensive. I have traded VNR for AQN opportunistically because of the sector rotation taking place in utilities that has made AQN’s price a more attractive entry point.

My thoughts on trading this quarter (Q1 2018)

I have purposefully set a quarterly trading date for my buying and selling of securities to prevent over-trading and to provide time for reflection between trades.

Mid-March 2018 is my next trading window. What am I thinking?

I have accumulated a fair bit of cash/short-term bonds in our portfolio (almost 21% compared to our 9% target) that needs to be deployed. We are currently underweight bonds in our bond ladder (22% vs. 36% target), slightly overweight in stocks (48% vs. 46%) and about even in bullion at 9%.

I intend to purchase 1/4 of our underweight amount in bonds and will continue along the same path for the remaining three quarters. Yield to maturity in the retail, investment grade bond market, available via my discount brokers is now sitting at about 3.4% on five to six year maturities. So I will seek out positions of that nature. I also need to top up a bit in the three-year and four-year timeframes. So, as March 15 approaches, I will start filling those gaps.

The only other trade I am contemplating is to take advantage of the market’s current lack of interest in dividend paying stocks like utilities. I have been wanting to purchase Algonquin Power (TSX: AQN) for some time, and it now sits at a forward P/E of 16.47 and a growing dividend of 4.67%, rising steadily since 2009, which is pretty good for this “growthy” dividend payer.

FASTGraphs shows a total annual rate of return since January 2010 of 18.5%. YCharts shows it at a cumulative return of 370% in that same time period  and StockRover shows a 102% cumulative five-year total return.

According to YCharts, it is 8.5% under value, and according to FASTGraphs it is 7.9% under value on a P/E basis. FASTGraphs has it at a 16% discount using historical price/operating cash flow measures. It is nearly 10% off its 52 week high.

So, even though this stock will push our equity allocation even a bit more over target, I believe it is a good addition to our portfolio, especially as we get a little closer to retirement. I may look to trim technology stocks again later this year to re-balance down a bit, since they seem to be making the fastest gains again so far this year (buy low, sell high is my thinking). As our savings, dividends and interest payments accumulate over the course of the year, the equity allocation will trend down slightly in relative terms (all things being equal).

I don’t really want to add another position (going to 34 equity holdings from 33), but I can’t see anything else to sell outright at the present time. And I do like AQN.TO, as does 5i Research (“one of our favourites”) who I follow. The latest commentary from 5i on the March 2 quarterly report suggests fundamentals are good (especially earnings). AQN’s recent acquisition seems to be working out fine as well.

My December 2017 annual portfolio review is now posted

Our portfolio beat it’s own target return objective in 2017: 7.82% vs. 7.00%, (or about 12% better than planned), and our asset allocations ended up mostly in line with what I expected.

We also beat our benchmark: 7.82% vs. 6.37% (or about 23% better than our benchmark).

See how it worked out in more detail here.

I’ve updated our household investment plan with some refined objectives

My latest version of our household investment plan is now published (as of December 31, 2017).

As I describe it: “For the first time, this investment plan update includes refining our objectives based on explicitly creating portfolio “buckets” that will guide our target asset allocations and serve to fund our retirement.”

It is not a radical change from previous plans. My rationale for choosing asset allocation targets is evolving though.

This plan and previous versions are all available here.

December 15, 2017 – It’s my quarterly trading day and what did I do?

As is my practice I only trade securities four times a year after reviewing our household portfolio performance, asset allocations, and any new ideas that I wish to act upon.

This quarter was a bit of a watershed. Today was my trading day and guess what? I did not make a single trade. 

Performance is ahead of our targeted 7% annual rate of return. Asset allocations are all close to plan. No new ideas emerged that seemed any better than those I have had before.

As I said before, it may sound boring, but I am pretty excited to be doing what I set out to do and, at least for now, being rewarded for it.

I do think sometimes the best move is no move at all.

I will do a full update on the quarter and year and post it here at money4retirement.ca in early January. Some of my ideas regarding asset allocation are evolving as we get closer to the distribution stage of our portfolio (i.e., retiring from full-time employment in the next couple of years).

 

Is it time to sell Shopify?

In a reply to an email from friends today about Shopify’s stock pullback due to the recent short report issued by Citron, and a related article in the Globe and Mail about SHOP’s future prospects (paywall), I pointed out the following considerations that I consider relevant (at least from my point of view):

Maybe the stock price rises are over. Maybe not. Certainly caution is warranted. Keep allocations reasonable if holding. I sold half my position last month. I am watching it closely now and may sell more in December when I next trade (I only trade four times a year). I am still up 167%.

I note the stock, after the big pullback Wednesday, has remained weak, but it’s not collapsing. It is now (this morning) back where it was August 22. I expect the November 2nd earnings report will be very significant for its short-term future price behaviour. So far it has beaten estimates every time. We’ll see if that continues. Also, guidance towards profitability will likely be scrutinized closely. It’s expected to be profitable in 2018.

I personally believe the short report is exaggerated. Aside from that, this stock has had a meteoric rise this year (not likely to be repeated next year) and it remains vulnerable to any shock – shorting, earnings miss or market correction. That doesn’t necessarily mean this stock must be sold provided weightings are reasonable and a long-term position is the game plan.

I also note that Shopify has defended its marketing practices and business model.

Having said all this, SHOP is possibly going to breach one of my sell rules I’ve identified in our household portfolio plan: consider selling any security if its fundamentals change negatively such as chronic negative sentiment among investors (including short-attacks).

I know sentiment changes are *not* (corrected) truly fundamental. But in some cases sentiment can be far more important than fundamentals.

I’ll watch SHOP closely over the next few weeks to see how to proceed. As implied, November 2nd’s earnings report will be very important for short-term sentiment beyond the short report. I will try to look past it.

My current stance: hold.

Please see the important disclaimer for additional important caveats and limitations about the information provided on the money4retirement.ca site. 

My portfolio trade ideas for September 2017

I’m looking ahead to my self-imposed quarterly trading date in September (this time it will be a bit earlier than mid-month as I am travelling).

We’re about 2% above our 47.5% target equity allocation right now.

The market seems a bit fragile and pricey to me. I believe risks that could affect markets have materially heightened during the course of 2017 (mainly due to sabre-rattling and possible political instability down in the US).

But then again, who knows?

I am planning on taking a bit of a risk-off posture when re-balancing this quarter.

Here are my trading thoughts:*

  • Reduce Shopify SHOP (overweight in equities, overweight in a single security & overweight in the tech sector)
  • Sell Cineplex CGX (overweight in equities, small holding/clean up trade, recent change in business model & very high volatility in the last quarter)
  • Sell Enghouse ENGH (overweight in equities, small holding/clean up trade & overweight in the tech sector)
  • Buy investment grade corporate bonds with 2-4 years duration (bond ladder replenishment & putting some idle cash to work)
  • Buy Valener VNR (shift to an income stock in the more defensive utility sector as part of transition into retirement, decent business fundamentals/value, low debt, sustainably growing 5.1% dividend along with a very low beta)
  • Buy North West Co. (NWC) (shift to an income stock in the more defensive consumer staples sector as part of transition into retirement, decent business fundamentals, not too much debt, sustainably growing 4% dividend along with a very low beta)
  • Buy gold (asset rebalancing)

Selling some shares in Shopify requires me to overcome some strong emotions. I have a history in e-commerce dating back to 1989 (as a consultant and as an entrepreneur) and probably appreciate what Shopify is doing better than many.

I still have a lot of long-term confidence in the company.

But we’re now well above the maximum allocation I’d like to have to any one company (it represents 9.4% of our equity holdings, and 4.6% of our total portfolio).

Additionally, over half of our portfolio’s gains this year have come from this stock. In 15 months we’ve made a 239% return. I feel like it is becoming too much of a gamble.

So I think it’s time to take some profits and reduce to a smaller, but still overweight position (~5% of our equity holdings). Like I say, I am still confident in the company long term.

 

*When I first posted about my trades I had thought of selling Fairfax Financial FFH as well. But I was reminded that it is still somewhat non-correlated to markets (5 year beta of only 0.23) due to the nature of some of its private equity holdings. So I am going to stay the course and keep it. I also had not identified my intent to buy North West Company.

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.