The strategic asset mix: Your home base in turbulent times

Thu, 23 Mar 2017 09:00:46 PDT

Special to the Globe and Mail
by Tom Bradley

The market has been hitting new highs. Resource stocks are up and down like a yo-yo. And with Donald Trump and Brexit, gold is back in the conversation.

In these confusing times, what is an investor to do? Are there any places to hide?

Before we go searching, we need to recognize there are always uncertainties. It’s a constant part of investing. With Brexit looming and Mr. Trump agitating, it may be more uncertain than usual, but we never know where stock prices are going in the short to medium term.

I should disclose off the top that I’m taking a cautious tack in my fund, the Steadyhand Founders Fund. The political landscape in the United States and Europe is a factor. I see high valuations, even higher debt levels and a heavy reliance on near-zero interest rates leading to lower than usual returns over the next five years.

Where to find shelter will depend on the purpose of the money.

If you’re retired and drawing a paycheque from your portfolio, hiding places are hard to find. We’re all living longer, so we need to generate an income for 20 to 40 years while guarding against inflation. With fixed income securities yielding so little, this means investing in a diversified portfolio that can earn 3% to 4% a year.

There’s no getting around the fact that a portfolio of bonds, and Canadian and foreign stocks will have down periods. So, shelter must come from holding a separate spending reserve. This cash buffer can be used to make up any shortfall after interest, dividend and pension income, and most importantly, provide a cushion while your portfolio rides out the bumps.

Given the good markets we’ve had, it’s a good time to replenish the reserve (or set one up) by putting aside an amount equivalent to two years of required spending. It won’t earn much, but when the inevitable market correction comes, you’ll be glad you took some cover.

If you’re at the other end of the spectrum and don’t need the money for at least 10 years, the search is much easier and dare I say more fruitful.

As a long-term investor, your portfolio needs to fit with your goals, time frame and temperament. At our firm, we call it a strategic asset mix, or SAM. Your SAM is the combination of asset types, geographies and industries that is most likely to achieve your return objective. It’s an educated guess. There are no guarantees and it requires some tradeoffs. After all, to achieve true diversification, you won’t love everything in the portfolio.

When you’re particularly uneasy about the economy and markets, stuffing cash under the mattress isn’t the answer. Gold bricks aren’t either. Both these options imply that you know what’s going to happen, which you don’t.

There are hedge funds and bank-sold structured products that set out to reduce market risk, but they require a higher level of expertise and are expensive.

No, when you’re at wits end, it’s time to go to your home base – the long-term asset mix that you’ve previously agonized over. Markets bounce around, but they rise over time and you need to be there. So your SAM should always be your secure place.

If it’s your nature to have a portfolio that reflects your views of the world (and you have some skill and experience), your asset mix shifts should still be done in the context of your SAM. That means tilting your portfolio, not making wholesale changes. No investor is smart enough to time the market and catch all the trends. For evidence of that, we need look back no further than last year. Everyone got everything wrong in 2016.

So, you may hold more cash, or shift in or out of U.S. stocks, the banks and high-yield bonds, but you always want to make your bets in the context of a broadly diversified portfolio. As an example, our Founders Fund has a SAM of 60% stocks and 40% fixed income. I’m currently hiding with slightly fewer stocks (57%), considerably less bonds (25%) and an unusually large cash reserve (18%). The fund is prepared for choppier markets, but hasn’t abandoned its friend SAM.

Emmylou: Namaste

Tue, 14 Mar 2017 09:33:55 PDT

by Scott Ronalds

When we last checked in with Emmylou around this time last year, she was on the verge of making a big life change – transitioning to part-time work in a new field. Well, she officially turned in her Louboutins for Lululemons and is crushing it as a part-time yoga instructor.

The move came with a lot of anxiety and some second guessing. Emmylou figured she’d give it a year to assess the impact it would have on her life (financial and emotional). So here we are. Our favourite yogi recently checked in with us and as expected, the biggest change she’s had to adjust to has been a drop in her income. But she’s loving life and is making it work financially. Emmylou hasn’t had to draw on her emergency fund or Steadyhand portfolio yet. She figures she’ll be in good shape for another year, but may want to cut back on her classes and establish a small withdrawal program at that time, probably $1,000 a month.

We briefly discussed a strategy whereby she could set aside a year’s worth of withdrawals ($12,000) in the Savings Fund and then redeem the money on a monthly basis, essentially providing her with another paycheque. This would shelter the money from market volatility, but still earn some interest. She liked the idea and will re-consider it prior to when the time comes.

As for her investments with us, Emmylou holds the Founders Fund across all her accounts. Her portfolio grew by 11% over the past 12 months (ending February 28th) and has grown to just under $685,000 over the past 5 years (she started with $395,000 in 2012 and has added $100,000 in net contributions along the way). The Founders Fund has produced an annualized return of 8.0% over the past five years. Emmylou’s return has been higher because of her fee discount. We walked her through her performance using her statement as the template.

We also let Emmylou know that she has another reason to celebrate – she’s now a member of the 5-Year Club. This means her all-in fee just dropped by 7%, from 0.99% to 0.92%.

We counseled Emmylou that returns may not be as good over the next five years, as the markets have had a good run and are probably due to cool off at some point. This isn’t to say that she should expect poor returns, but rather she should keep her expectations in check and be prepared for some bumps.

In wrapping up our review, Emmylou let us know that she’s really starting to embrace the whole concept of long-term investing. She expressed it best when we asked her if she felt the need to make any changes to her portfolio: “N’amastay with my plan.”

Management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The indicated rates of return are the historical annual total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns.


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