For the first 30 or so years of working, saving and investing, you’ll be first in the mode of getting out of the hole (paying down debt), and then building your net worth (that’s wealth accumulation.). But don’t forget, wealth accumulation isn’t the ultimate goal. Decumulation is! (a separate category here at the Hub).
In the first two installments of our three-part “Hidden in Plain Sight” investment strategy series, we’ve covered the importance of staying invested to earn market returns, while managing the risks involved. We’ll conclude with what may be the most obvious and powerful piece of advice of all, even if it does not seem to receive the attention it deserves.
I have just returned from a two-week trip to Hong Kong and Taiwan, just in time for the Federal Reserve’s long-awaited decision to delay the first rate hike since the financial crisis.
The key phrase “Heightened uncertainties abroad,” spoke as loudly as the lack of action, as Fed chairwoman Janet Yellen noted the risks of both China and Emerging Markets in generally spilling over into the United States.
Hedging in the Retirement Risk Zone
For those of us who are in the “Retirement Risk Zone,” — including Yours Truly — the caution behind the Fed’s decision could suggest that for some it may be appropriate to dial down portfolio risks. Since late August, I have followed my personal financial adviser’s recommendation to remain invested but to hedge back one third of US and Canadian equity exposure.
Generally, at whatever age, it makes little sense to take more risk than you need to take and the Fed’s decision (or non-decision) underlines that there are still extensive risks out there, certainly in the equity markets as well as fixed income. Fred Kirby, a fee-for-service planner at Dimensional Investment Planning, says it’s time to be cautious and protect profits. As I quoted him earlier this year, he suggests that those who are averse to market timing can consider the newer “low-volatility” ETFs. For Canadian exposure, he suggests the BMO Low Volatility Canadian Equity ETF (ZLB), which holds 40 stocks deemed to have the lowest risk. For U.S. stocks he likes the BMO Low Volatility US Equity ETF (ZLU), which uses the same methodology and holds 100 companies. For international equities, Kirby likes the iShares MSCI EAFE Minimum Volatility Index ETF (XMI). (There’s also an iShares low-vol ETF for Emerging Markets).
“These ETFs automatically position the cautious investor for any additional future gains without having to make a market-timing re-entry decision,” Kirby says. “This could be just the sort of compromise that lets some investors stick with their investment plans even when they do not want to.”
Today’s tip: “Investor shorthand can provide a useful guide to investment information, but it can also oversimplify analysis and events and steer investors into bad decisions.”
Investor shorthand can help you think about and talk about large blocks of investment information. But it may also lead you to make associations and come to conclusions that can cost you money.
For example, think about the common investor shorthand term, low-p/e stocks. It encompasses four statistics: price per share; per-share earnings; the p/e (the ratio of a stock’s price to its per-share earnings); and low p/e (which suggests a normal range exists for p/e’s generally, or for p/e’s of stocks of a particular type or description, and that these stocks are near the lower half of the range).
Some investors, beginners especially, see special appeal in stocks with low p/e’s. They jump to the conclusion that the p/e is low because the “p” or stock is low, and that this is a sure sign of a bargain. When you use that term to generalize, however, you can lose sight of the fact that p/e’s can be (or can seem) low for all sorts of reasons.
For example, maybe the “e” or earnings is temporarily high, due to unusual factors that will soon revert to normal or worse. Or, the stock price may be low, and headed lower, due to negative conditions or trends in the company or its industry.
Of course, many experienced investors understand how the use of shorthand investment terms can warp investor perceptions, and lead them to take on unwanted risk. But they fail to see the upside-down version of that risk in newer, poorly-defined terms. One good example is “bubble”.
If you thought that getting through the long 2015 federal election campaign — the “spin the wheel for tax dollars” game show – -was more than your attention span could handle; think again. The Longevity game show is in full swing! And by all accounts, we have barely begun to see the peak in audience participation.
As one of over 9 million Baby Boomers playing from home with your finger on the buzzer, your first question is – “What is your longevity expectation?” Quick thinking might suggest to you, based on the last statistical survey you read, that you are an “average Canadian,” so your immediate answer could be 82.
Finger off the buzzer. Depending on what perspective you have from the perch you sit on in your age band, how you envision your life expectancy will depend on so many variables. Living beyond that average 82 may appear like a short or a long game. So the second question is: “How will you feed your longevity?”
Recently, the market has been playing right into an important addition to our financial “STOP Doing” list: Stop trying to correct for market corrections.
Just as it takes no special skill to predict some days of sub-zero temperatures this winter, we were not being prescient a year ago, when we said that we would probably experience a correction sooner or later. One need only consider abundantly available evidence to recognize that, viewed seasonally, the market frequently “corrects” itself, sometimes dramatically. It’s only when we take the long view that we can see the market’s overall upward movement through the years.
For example, consider the Dimensional Fund Advisors slide shown below, which depicts the U.S. stock market’s gains and losses over the past 35 years. Continue Reading…
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