January 2019 CommentarySubmitted by Mark Smith-Windsor Investment Advisor on January 7th, 2019
For investors the best part of 2018 was that it ended. It was a rough year. The TSX was down 12%. The US markets faired a little better, down around 6% for the S&P 500. What will 2019 bring? The media likes predictions, but nobody actually knows. My guess is that given the dramatic out performance of U.S. markets over the past decade, things will normalize.
I don’t know where we are in the economic cycle but we are likely closer to the end than the beginning. Frothy activity in the technology sector, bitcoin, marijuana shares, and examples such as Softbank raising a 100 Billion dollar venture capital fund, are typical of late cycle phenomenon. Often when the cycle ends, we can see a regime change where previously underperforming areas of the market begin to outperform, and yesterday’s winners turn in to dogs.
The challenging psychology of share ownership.
If getting great returns were easy, everybody would get them. It has been shown that most investors in mutual funds under perform the very funds they invest in. This is because typically, people jump into and out of the funds at the wrong time. I don’t use a lot of funds in my practice, but the principle still applies. At times when the market is difficult, it is most important to keep your wits about you. It’s okay to make changes, but a complete liquidation is generally a bad idea.
What I find helpful when the markets are rough, is to ignore what is unknowable and focus on what we do know.
By that I mean basically ignore the media hysteria.
What do we know?
- The best values to be had in the market, are when the outlook is most uncertain, and commentary most negative.
- In a bear market we don’t know where the bottom is, but it is usually a good time to put long term money to work.
- A whole portfolio of guaranteed investments is not a great deal.
A lower risk alternative to investing in shares would be short term bonds. The 5 year Government of Canada bond currently pays 1.93%. The inflation rate average for 2018 was 2.2%. For a high income investor the tax rate on bonds in Saskatchewan is 48% (roughly twice the tax rate paid on equity and dividend returns). So that means on a real after tax basis the return on a 5 year Government bond is minus -1.2% annually.
One area of the market that looks good in the wake of the selloff is the preferred share market. In Canada, you can build a high quality portfolio of income generating preferred shares yielding over 5% right now. I think there is even good potential for capital appreciation in preferred’s. A preferred share is a hybrid between a stock and a bond. They are technically shares, but they rank ahead of common shares and provide contractual income. They come in all types with as many different features as bankers can dream up. The Canadian banks are the biggest issuers of preferreds, but my preference is a diversified portfolio not weighted too much to one sector.
Now is a great time to review your investment portfolio. If you would like me to review your portfolio and evaluate each investment for you, please contact me.
As always I am available for any questions financial or otherwise at 306-385-6261 or by email email@example.com