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It's time to give your portfolio a second look
Категория: «Finances » Credit and Debt>» »
Viewed: [174] | Comments: [0] | 2-02-2010, 00:59
Taking stock of your portfolio once a quarter isn't a bad idea, especially with recent volatility in the market.
Patricia Lovett-Reid
Despite what I do for a living, I don't sweat over my portfolio every day. I have an investment plan, based on my goals, my investment horizon and my risk tolerance.
I may not check its status every day, but my portfolio does get a regular checkup.
I recommend rebalancing your portfolio at least once a year, but taking stock once a quarter isn't a bad idea either. We're only halfway through the year and look what's happened:
* The TSX Composite dropped 16 per cent from Dec. 31, 2008, to its low on March 9.
* The S&P 500 recorded a stomach-churning 25 per cent loss in the same period.
* The financial system was in free fall, the widespread nationalization of U.S. banks was debated and people openly discussed the possibility of a depression.
It seemed as though the end of civilization was near.
But then something happened. The dark clouds parted, credit markets thawed, and green shoots gave investors hope. Economic data seems to suggest that we are past the worst of the decline. First quarter earnings beat low expectations. Before we knew it, stocks rallied. Now, the S&P is modestly positive for the year-to-date and the TSX is up in the mid-teens.
So is it nothing but clear skies and smooth sailing ahead? Of course not. Many expect a pullback from the recent stock market gains sometime in the near future. And while the worst of the recession seems to be behind us, it's not over yet.
So as we review and rebalance our portfolios how should we allocate our assets for the summer quarter?
One of the best known investment aphorisms is that "market returns tend to revert to the mean over time." When stocks go too far in one direction, they pull back. If we examine the TSX over the first half of the year, we see that the hardest hit sectors are the ones that have recovered the most. The always-volatile tech sector has led the recovery, followed by the similarly beaten up financial, energy and industrial sectors.
Meanwhile, defensive sectors such as utilities, consumer staples and telecom, which held up relatively well during the downturn, have not participated as strongly in the recovery.
What's more attractive: stocks or bonds?
There are a few factors to consider. Investors are looking beyond the recession to the recovery. Earnings expectations remain low: equity valuations remain attractive, even after equity markets' recent advance. The S&P 500 is currently trading at around 14 times the 2009 forecast operating earnings, a below-average multiple. In other words: stocks still look cheap.
Volatility, measured by the VIX, continues to decline from its fall peak of around 80 and is now around 30. This is part of a continuing trend — and it's a good thing.
Liquidity, as measured by money market fund balances, is extremely high. A lot of investors are in cash, waiting for the right time to buy equities. When all that cash gets off the sidelines and onto the playing field, equities could enjoy a rally. These factors all indicate that it's a good time for a modest switch from government bonds to equities.
What kind of stocks should I focus on?
In terms of investing style, growth stocks and funds have had the strongest recovery; blue chip and value portfolios have occupied the middle ground; and portfolios emphasizing stable, dividend paying stocks have been slowest off the mark.
Commodity prices have improved recently. This naturally favours commodity-producing countries such as Canada and those in emerging markets. As a result, an increased exposure to these two regions is worth considering.
Of course, just because equities are attractive doesn't mean we should ignore plain vanilla bonds. The fixed income component of a portfolio is essential. It provides income and stability when equities are making you seasick. The question we need to ask is: Are investment grade Canadian corporate bonds more or less attractive than government issues? The corporate bonds represent much better value because of their higher yields and lower interest rate risk thanks to their relatively short duration.
Make sure to discuss your asset allocation with your financial advisor. You'll put yourself back on the right path to meeting your goals, and you can enjoy the summer without worrying about your portfolio. As a colleague of mine often says, hacuna matata — don't worry be happy.
Patricia Lovett-Reid
Despite what I do for a living, I don't sweat over my portfolio every day. I have an investment plan, based on my goals, my investment horizon and my risk tolerance.
I may not check its status every day, but my portfolio does get a regular checkup.
I recommend rebalancing your portfolio at least once a year, but taking stock once a quarter isn't a bad idea either. We're only halfway through the year and look what's happened:
* The TSX Composite dropped 16 per cent from Dec. 31, 2008, to its low on March 9.
* The S&P 500 recorded a stomach-churning 25 per cent loss in the same period.
* The financial system was in free fall, the widespread nationalization of U.S. banks was debated and people openly discussed the possibility of a depression.
It seemed as though the end of civilization was near.
But then something happened. The dark clouds parted, credit markets thawed, and green shoots gave investors hope. Economic data seems to suggest that we are past the worst of the decline. First quarter earnings beat low expectations. Before we knew it, stocks rallied. Now, the S&P is modestly positive for the year-to-date and the TSX is up in the mid-teens.
So is it nothing but clear skies and smooth sailing ahead? Of course not. Many expect a pullback from the recent stock market gains sometime in the near future. And while the worst of the recession seems to be behind us, it's not over yet.
So as we review and rebalance our portfolios how should we allocate our assets for the summer quarter?
One of the best known investment aphorisms is that "market returns tend to revert to the mean over time." When stocks go too far in one direction, they pull back. If we examine the TSX over the first half of the year, we see that the hardest hit sectors are the ones that have recovered the most. The always-volatile tech sector has led the recovery, followed by the similarly beaten up financial, energy and industrial sectors.
Meanwhile, defensive sectors such as utilities, consumer staples and telecom, which held up relatively well during the downturn, have not participated as strongly in the recovery.
What's more attractive: stocks or bonds?
There are a few factors to consider. Investors are looking beyond the recession to the recovery. Earnings expectations remain low: equity valuations remain attractive, even after equity markets' recent advance. The S&P 500 is currently trading at around 14 times the 2009 forecast operating earnings, a below-average multiple. In other words: stocks still look cheap.
Volatility, measured by the VIX, continues to decline from its fall peak of around 80 and is now around 30. This is part of a continuing trend — and it's a good thing.
Liquidity, as measured by money market fund balances, is extremely high. A lot of investors are in cash, waiting for the right time to buy equities. When all that cash gets off the sidelines and onto the playing field, equities could enjoy a rally. These factors all indicate that it's a good time for a modest switch from government bonds to equities.
What kind of stocks should I focus on?
In terms of investing style, growth stocks and funds have had the strongest recovery; blue chip and value portfolios have occupied the middle ground; and portfolios emphasizing stable, dividend paying stocks have been slowest off the mark.
Commodity prices have improved recently. This naturally favours commodity-producing countries such as Canada and those in emerging markets. As a result, an increased exposure to these two regions is worth considering.
Of course, just because equities are attractive doesn't mean we should ignore plain vanilla bonds. The fixed income component of a portfolio is essential. It provides income and stability when equities are making you seasick. The question we need to ask is: Are investment grade Canadian corporate bonds more or less attractive than government issues? The corporate bonds represent much better value because of their higher yields and lower interest rate risk thanks to their relatively short duration.
Make sure to discuss your asset allocation with your financial advisor. You'll put yourself back on the right path to meeting your goals, and you can enjoy the summer without worrying about your portfolio. As a colleague of mine often says, hacuna matata — don't worry be happy.