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.

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.

More on the topic of currency hedging

I ran across a recent article on the Couch Potato web site about currency hedging. While it touches on many of the points from my previous post on this topic, it goes further to make a recommendation about whether or not to hedge foreign investments.

The short answer is “no.” The reason given is you’re falling prey to market timing. And we know that means you have to time when to hedge and when not to hedge.

Currency movements, like other market moves, are very tough to time.

Read more here.

See the important disclaimer about content on money4retirement.ca.

Foreign security investments – to hedge or not to hedge?

At a meeting this week of the OSC steering committee one of the participants was discussing the dilemma of whether or not to hedge a US investment. This theme has been broached previously by another steering committee participant. So I thought it might be a good idea to write about it.

In general terms I understand what hedging means: if you hedge you are removing the impact of currency exchange rates from the overall performance of a foreign investment. In other words, if you wish to ensure that the relative change in value between your own currency and a foreign currency is not going to impact your investment return you should hedge. This way only the relative performance of the underlying security in its own currency will determine your return on investment.

Hedging is not easy to do for retail investors for a single security (e.g., a specific stock or bond). However, there are exchange traded funds (ETFs) that offer hedging for you. These funds manage the futures contracts on currencies for the holdings of the fund on your behalf.

Like many things in investing, whether to hedge or not depends on many factors that only you are best able to answer.

Obviously, the first question is should a Canadian investor own any foreign securities at all? I think the general consensus is “yes” given how small our stock market and economy are in the world and given our relatively easy access to US securities markets.  The US market offers a much richer array of investments than those in Canada alone. Of course there are other regions in the world that can help a Canadian investor even further diversify their portfolio if they so desire.

I found a very clearly written piece on the subject of hedging that I will summarize. The links to the source document and examples of hedged products are provided below.

Situations that might lead you to hedge:

  • you assume your own currency is going to climb relative to the foreign currency of the investment (e.g., you believe the Canadian dollar is going to rise against the US dollar)
  • you don’t really have an assumption about relative currency exchange rate movements (i.e., you don’t have a strong belief in the direction of your own currency vs. the foreign one)
  • if the underlying asset tends to move in the same direction as the currency over time hedging may reduce volatility
  • your investment timeframe is relatively short and you don’t want currency valuations to affect the performance of your investment
  • the cost of hedging is low enough to make it reasonable to do (e.g., US dollar hedges are relatively cheap compared to some other currency hedges)

Situations that might lead you to not hedge:

  • you assume your own currency is going to decline in value relative to the foreign currency of the security you own or would like to own
  • you have a long investment time horizon and you wish to be exposed to the performance of both the security and the currency
  • the investment security tends to perform differently than the underlying currency (i.e., it is not correlated) leading you to favour not hedging as this may provide a source of additional diversification in your portfolio (e.g., the US dollar tends not to gain when the US stock market is gaining)
  • not hedging is being used as a further way to diversify holdings (some would argue in the long run hedging is not needed since currencies tend to revert to their mean exchange rates, or balance out in the long haul)
  • the cost of hedging is high and affects overall investment performance

For the individual investor, the most practical way to hedge is to buy broad-based  ETFs from providers that offer a hedged version of the product. This avoids having to write futures contracts against a currency, a fairly complicated and potentially expensive undertaking.

One other consideration. ETFs that use hedges can be passive or active. The former tends to provide more consistency whereas the latter involves ongoing management. The active approach attempts to add to the return of an investment product by trying to use the currency exchange rate changes as an additional source of income.

In the end, it is up the the individual investor to decide whether or not to hedge. There is no right or wrong answer; it is really about what you are comfortable with. Hopefully these considerations will help with that decision.

Further reading: 

See the important disclaimer about content on money4retirement.ca.