These three common mistakes are hurting Canadians’ portfolios
Martin Pelletier is a booster for planning and considering big-picture objectives.
Summer is supposed to be a time of calm in the markets, but this year there has been much trepidation, something that is influencing near-term asset allocation decisions being made within portfolios. It isn’t uncommon to allow human emotion into the investment decision-making process but it can come at the cost of not reaching one’s individual goals and objectives.
The problem is that most advisers and investors work backwards, starting with the investment design. Consequently, instead of having a portfolio built to achieve one’s goals, you end up with one that is filled with whatever happens to be popular at the moment or, worse, trying to time an appropriate entry point.
These pitfalls are why it’s important to lead with planning and then compare current asset allocations against your big-picture goals. During this process, we’ve looked at a lot of portfolios and have seen three common trends influenced by the current market environment.
TOO MUCH CASH
Investors have been shying away from fixed income with interest rates and bond yields being so low and fear of an impending correction when rates start to move higher. While this is understandable, it is disregarding how fixed income behaves within a well-diversified portfolio given its typical negative correlation to equities, especially during large corrections.
It’s important to remember that despite yields being so low, they can go still go lower as all one has to do is look to parts of Europe where negative rates dominate. Also, should rates move higher and the bond markets correct it would likely be during a stronger economic environment and therefore, more than offset by higher equity values.
Then there are those going to cash to try and time the market. This is a very dangerous thing to do especially if one misses out on market rallies.
For example, a study by Putnam Investments showed that those investors who missed out on only the 10 best days in the S&P 500 over the 15-year period to 2017 ended up giving away half of their returns.
TOO MUCH YIELD CHASING
Another problem with low interest rates is that it is incentivizing investors to go to places they normally don’t.
For example, the growth of the private debt and mortgage market is one area that has been a major recipient. Investors are onboarding much higher levels of risk into their portfolios by giving up liquidity in exchange for a higher promised yield. This is because there is a perception that these are lower risk simply because of the lack of transparency and variability when compared to public vehicles that are marked-to-market on a regular basis.
TOO MUCH CANADA
There is nothing wrong with being a proud Canadian, but extending that attitude to your investment portfolio can be a dangerous thing.
Unfortunately, most of us have a home country bias in our portfolios, one that is exacerbated by the over-concentration of energy and financial companies in the TSX.
Canada’s main index is also top heavy, with the Top 10 stocks representing nearly 40 per cent of the TSX compared to 20 per cent in the U.S. and a 10 per cent in EAFE markets.
As a result, those invested solely in Canada have missed out on some good returns elsewhere. For example, as at Sept. 5, 2019, we calculate that the S&P TSX Composite is up a paltry 1.26 per cent per year over past five years compared to the S&P 500, which is up an annual 8.28 per cent.
A great way to avoid these pitfalls is to focus on playing the long-game and start by looking at what you want to achieve, the rate of return required to reach that goal and if that return is realistic or not given current market conditions.
Finally, put it all together by custom building a well-diversified portfolio with asset weightings dependent on the aforementioned.
Financial Post
Martin Pelletier, CFA, is a portfolio manager and OCIO at
Trivest Wealth Counsel Ltd, a Calgary-based private client and institutional investment firm specializing in discretionary risk-managed portfolios as well as investment audit and oversight services.