Why timing the market is fruitless, top small-cap stock picks, and what 26 strategists predict for the TSX

Every study ever done on longer term investor portfolio returns concludes that the vast majority of investors would increase performance by buying the index and forgetting about their account. Every. Single. Study.

This isn't advice that most brokers are likely to volunteer. And, if I'm being honest, if every investor went passive and stopped following the market closely, it wouldn't be great for business here at Globe Investor, either. Thankfully for us, through a combination of over-confidence and the 'fun' of picking stocks and trying to beat the market, the number of active stock picking investors remains high.

Timing the market – moving in and out of cash to avoid investment losses and maximize gains – is among the most common ways investors (including me - I have a large cash position in my RRSP at the moment ) try, and fail, to outperform the index. But a recent story in the Wall Street Journal, bluntly titled "Why You're a Lousy Investor and Don't Even Know It," underscored the widespread hopelessness of the practice. The article suggests that even with a time machine and access to future economic growth statistics, most investors would still underperform the index.

Author Spencer Jakab uses the plot on Back to the Future II as a loose template – only this time Biff gets future economic growth statistics rather than sports scores - to analyze the returns for an investor that went to 100 per cent cash at the beginning of each recession from 1955 to 1985, and back to 100 per cent equities on the last day of the recession.

"Even ignoring taxes and fees, a $10,000 investment in 1955 would be worth $122,000 by 1985 invested this way rather than $149,000 if [the investor] had just let his money sit untouched in stocks… a new bull market usually starts when a recession is still under way, and it is with a bang, not a whimper."

The story is a cautionary one. Even investors able to predict economic data perfectly still can't time the market. We should all stop trying.

Three big numbers to note

14,500 The median forecast for the S&P/TSX Composite index at year end from a Reuters poll of 26 strategists. That's nearly unchanged from current levels but 12 per cent above where it ended last year.

7.7% Gains in the S&P 500 over the past 10 days. It closed at another record high on Tuesday, as did the Dow Jones industrial average.

26% The gain so far this year in Brazil's benchmark stock index, the Ibovespa, marking the biggest stock bull market in the world.

Stock picks

Boyd Group Income Fund. This Winnipeg-based auto repair business, with operations in both Canada and the U.S. has been an outstanding performer for a number of years, and analysts like it too, writes Gordon Pape. The company continues to grow by increasing sales and adding new locations. It's also had strong earnings and plans to double its business by 2020.

Savaria Corp. This accessibility equipment maker has caught the eye of investors interested in profiting from the desire seniors have to remain in their home for as long as possible, writes Brenda Bouw. Shares of the Laval, Que.-based company are up more than 55 per cent this year and some analysts suggest it's gotten a bit expensive, but still have buy ratings on the stock.

Sherwin-Williams Co. The company is opening its 200th Canadian paint store this weekend, and that highlights how strong a stock this paint seller is, writes David Milstead. It's average return on equity is 57 per cent over the last five years. In addition, analysts forecast double-digit growth over the next two years.

The Rundown

Crystal ball gazing
A new Reuters poll of 26 strategists has found little optimism for big returns for the rest of this year for the TSX. The median forecast was for the index to get to 14,500 by the end of the year. That's nearly unchanged from current levels. But considerable turbulence is being forecast, which could make for some profitable opportunities, and the index is forecast to get to 14,800 by mid-2017.

Insurers oversold
An otherwise favourable climate for Canadian equity investors has not shone on lifeco stocks, which have been undermined by falling bond yields, writes Tim Shufelt. But BMO thinks they are now oversold. The valuation discount of the lifecos relative to Canadian banks is now about 5 per cent wider than the 5- and 10-year historical averages, the bank notes.

A bizarre but positive sign for U.S. equities
On July 8, the dividend yield on the S&P 500 was higher than the yield on the 30-year U.S Treasury bond for the first time since March of 2009, write Scott Barlow. That means that investors were willing to lock in the smaller income stream in the bond rather than the higher yield of equities. And that's a good sign for U.S. equities, he explains.

Commodity revival
The anxiety over Brexit is expected to wane quickly, writes Ian McGugan, and Citigroup Inc. suggests that that will give way to a new surge in demand in 2017 for commodities from oil to sugar to copper.

A note for investor caution
David Rosenberg says the stock market has managed to "tiptoe" through all sorts of danger in this current cycle. We freaked out of Grexit, sank amid the Chinese currency devaluation, and now are fretting about the fallout from Brexit. But markets seem to shrug off all sorts of worries, but he suggests investors don't ignore the caution signs.

Earnings season underway
Alcoa Inc. got the earnings season underway after the close of market Monday, and the expectation for this earnings season is optimism, writes Tim Shufelt. The hopes are that American companies are starting to emerge from the worst profits recession since the financial crisis even though there may still be earnings declines overall this quarter.

Small-caps with a great outlook
Small-cap stocks beat the broader index in the first half of the year by a lot, writes Jennifer Dowty. They were up 26 per cent while the S&P/TSX composite added only 8 per cent. Jennifer provides a rundown of the TSX small caps with the greatest forecasted returns by analysts for the next 12 months.

The helping hand of rising energy markets
These three fund managers focused on the rebalancing energy markets to help them make gains as part of the investment challenge to raise money for the Holland Bloorview Kids Rehabilitation Hospital. Stocks they added included Crescent Point Energy Corp.,  Oasis Petroleum Inc., and Husky Energy Inc.

Ask Globe Investor

The Question:

"If the Canadian dollar continues to rise vs. the U.S. dollar, would it be wise to sell my U.S. stocks and then immediately repurchase them but as currency-hedged investments? That way, I don't lose my gains which were accrued due to a rapidly falling Canadian dollar." (Note: The reader sent this question in early June when the loonie had surged more than 2 cents (U.S.) in less than a week. Since then, the Canadian dollar has given back most of those gains, but the question is still relevant for anyone holding U.S dollar assets.)

The Answer:

The fact that you are sitting on unrealized gains from the Canadian dollar's drop is actually irrelevant to the question of what you should do now. You are in the same position as someone who is purchasing U.S. dollar assets today and trying to decide whether to hedge or not. In other words, it's the future that matters, not what happened to your portfolio in the past.

Hedging individual stocks is possible, though not easy, for small investors. A simpler approach is to buy currency-hedged exchange-traded funds. Keep in mind, however, that currency hedging is not an exact science and can exert a drag on your returns. Another point to consider is that owning unhedged U.S. dollar assets can actually help to control volatility in your portfolio. That's because, during times of financial turmoil, the U.S. dollar often rises because the currency is seen as a safe haven. This benefit will be lost if you hedge your U.S. assets.

My personal take on currency hedging is that, unless you have significant exposure to U.S. assets, hedging may not be worth the hassles or the potential costs. If you own a handful of U.S. companies as part of a well-diversified portfolio, then accepting some currency risk may be the best option.

-John Heinzl

Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.

What's up in the days ahead

David Milstead takes a refreshing look at DavidsTea, the Montreal-based tea retailer that went public to much excitement about a year ago. The stock tanked soon after its first earnings report, but investors are now taking another sip of the company, with shares up more than 60 per cent in five months. Meanwhile, long-term investors will want to check out a column from Validea's John Reese. He'll take a look at three stocks his Top 5 Gurus  portfolio suggests are interesting buys right now for disciplined investors.

Click here to see the Globe Investor earnings and economic news calendar.

More Globe Investor coverage

For more Globe Investor stories, follow us on Twitter @globeinvestor

Click here share your view of our newsletter and give us your suggestions.

Want to subscribe? Click here to sign up or visit The Globe's newsletter page and scroll down to the Globe Investor Newsletter.

For those not already Globe Unlimited subscribers, click here to join.

Compiled by Gillian Livingston and Darcy Keith