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….

 

 

 

 

 

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.

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).

Exciting(?!) changes I’m contemplating for my trades in December 2017

You may know that I limit my security trading activities to once per quarter, or four times per year. This helps me with my discipline when managing my portfolio.

My next trade date is on or about December 15. I have been thinking about what, if any, trades to make at that time.

I’ve come up with two very exciting(?!) changes for my portfolio:

  • re-balancing bonds by purchasing more
  • topping up our holding in OpenText due to its present valuation and to invest some idle cash in one of our TFSAs

Isn’t that exciting?

Well, although I’m being facetious, it actually is kind of exciting for me. The reason: I finally feel like I am in true maintenance mode for our household retirement portfolio. I like the holdings we have (although I continue to look for improvements) and am mostly focusing on keeping our asset allocations in balance with targets.

For many investors I suspect this sounds terribly boring. What, no chasing outsized gains in the latest momentum stock? No short selling or short-term trading. LOL. Not for me.

But, boring can be good. We’re on track, at today’s pace, to exceed our target 7% return this year (at 7.4% as of Sept. 30 and currently forecasting an 8.8% total return by year end if the trend continues). That’s beating the TSX’s return to date of 4.7% (or 2.27% as of Sept. 30) and is being achieved with relatively low risk (less than 50% exposure to equities).

Yep, boring can be good.

 

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.

Are market valuations and the risk of recession making you uncomfortable?

A friend of mine recently emailed me with a link to an blog post on a very well know personal finance web site about a recession in the works and a coming market crash. My friend wanted my opinion.

Here is my response to her:

I was processing my thoughts on the post, which started out with me thinking I don’t know anyone who can predict a recession or stock market correction with any degree of certainty. Those that do are often more lucky than anything. Worse, there are many who repeatedly claim corrections and recessions are coming and eventually they are right because corrections and recessions can and do happen pretty frequently. Then they claim they predicted correctly. You know the old saw: even a broken clock is right twice a day.

I think an important question we should all asks ourselves from time to time is: Using the actual amount of dollars in your portfolio, how would you feel if your stock portfolio dropped by 40 or 50 percent?

If it makes one too queasy to see the actual dollar value that is potentially at risk (however high or low that risk may be), and one operates without a sufficient back up plan (e.g., sufficient non-stock holdings to stop the heart from fluttering) or without sufficient confidence to believe the market will recover in a reasonable period of time, then it might simply indicate too much exposure to equities regardless of market timing.

Of course if the risk of a market correction is coupled with a potential job loss and resultant drop in income, that is a double whammy all of us should be prepared for.

I think it is prudent to periodically re-visit one’s plan to avoid having to sell stocks that are down due to a need for cash before they have time to recover (assuming they will of course, which is never 100% certain).

Of course there are counter arguments around suggesting the markets are setting up for a longer-term secular growth period, which could mean stocks might go up in value for some time to come. Or maybe we are experiencing irrational exuberance.

I don’t know which “thesis” is most likely correct, so I try to be prepared for any of them. Stress testing one’s holdings is a good idea from time to time.

Would you sign up for an average 9% return 89% of the time and a maximum drawdown of 2.6% only 11% of the time?

I have mentioned before that my household portfolio management plan is loosely modelled after the permanent portfolio advanced by Harry Browne. The idea behind the permanent portfolio is to create a relatively bullet-proof portfolio regardless of market conditions.

The pure approach is made up of of:

  • 25% S&P 500 stocks
  • 25% longest Treasury Bonds
  • 25% spot gold
  • 25% money market funds

My variation is quite different:

  • 45% Canadian, US and international stocks
  • 28.75% corporate, investment-grade bonds of 1 to 5 year term
  • 10% gold bullion and bullion stocks
  • 16.25% cash and corporate, investment-grade bonds of less than 1 year

A recent article suggests the permanent portfolio has done very well between 1969 and 2011 when re-balanced whenever one asset class became more than 10% out of alignment with target allocations.

It’s not a risk-free strategy, as discussed in the article, and performance in the past is no guarantee of performance in the future.

Have a read: The Permanent Portfolio by David Merkel.

How I make my portfolio management simpler

I spend a lot of time (probably way too much) watching the markets, reading news and doing research to try to improve the management of our household portfolio. I’ve come to realize that I, like most people, need some practical way to filter the massive amount of information available to me so it does not overwhelm and cause me to react emotionally.

I think I’ve come up with a simple way to create a filter.

To create my filter I need to first reiterate I am investing, on behalf of my wife and I, for hopefully the long haul (i.e., decades). I seek to make a steady and solid return, on average, every year (i.e., 7% compounded annually) that will allow us to achieve our financial objectives (i.e., retiring primarily based on returns from our self-directed portfolio).

Obviously then I am neither a day-trader nor short-term trader. I am a long-term investor.

I am not aiming to hit any home runs. Avoiding strike-outs and hitting singles or maybe doubles is good enough. If a home run happens, that is wonderful and I’ll happily take it, but it is not what I set out to do.

I don’t really care if others make more money than we do provided it’s not because I’m doing something dumb or making a mistake of some kind. This last sentence is really important to me as I can be very competitive. Investing is not a contest about who can make the most on a trade, or the most money over time. Thinking that way leads me to make emotional decisions.

I try to listen to what others are doing without judging them, hoping to learn from their successes and failures. I also try to understand the reasons for our own financial successes and failures.

I do like relative stability in our portfolio in all market conditions and try to only take on as much risk as needed to meet our financial objectives. I am not trying to make as much money as possible regardless of the risks involved. This means a significant portion of our portfolio is very conservative, some is balanced, and a small portion is higher risk with hopefully higher returns.

The main objectives for my trades are: re-balancing, improving portfolio performance and adjusting for fundamental changes in companies and secular changes in markets.

So, it’s no surprise that I try to apply the following simple criteria to filter new information:

  1. Does the information affect my long-term outlook for a company or markets or does the information just represent a blip or noise? Only if I judge it to be the former is it worthy of my further serious consideration.
  2. Similarly, does the information affect my chances of achieving our long-term objectives for portfolio performance or does it more probably represent a speed bump or a temporary diversion from a trend? Only if it is the former is it worthy of my further serious consideration.

Using these criteria to filter information, I would guess 95% or more of all the information I run across, however interesting, can be set aside as largely irrelevant to our objectives.

If either of the two criteria are met, the next step is to ask: What reasonable action, if any, should be taken in response to a change in long-term prospects, trends and/or potential portfolio performance?

I find the most simplifying aspect of this investing philosophy is it allows me to step back from new information and try to understand its strategic importance.

It forces me to try to keep an open mind, improve my judgement, and reduce emotional influences while improving my reasoning skills and helping me stay focused on the big picture.

It also helps me sleep better at night while managing our finances for our retirement without constantly churning and second-guessing myself (something I know I can be prone to).