A Bay Street sign, a symbol of Canada's economic markets and where main financial institutions are located, is seen in Toronto, May 1, 2013.Mark Blinch/Reuters
One of the most prominent finance experts believes that general rules for retirement spending are essentially useless, except possibly for assuaging fears that retirement savings are insufficient.
William Sharpe is a Nobel laureate as the developer of the Capital Asset Pricing Model and the Sharpe Ratio, which is arguably the most widely-used measure of risk-adjusted return. In a recent interview, Mr. Sharpe called retirement spending strategies as 'the nastiest, hardest problem in finance.'
Mr. Sharpe believes that popular financial planning tactics like spending four per cent of savings per year in retirement are unlikely to work well because they do not take into account the thousands of different market scenarios that could occur.
Ritholtz Wealth Management founder Barry Ritholtz summarizes Mr. Sharpe's view , "Sharpe starts his analysis with two protagonists trying to figure out how much money to withdraw from their portfolios annually in retirement. To reach the optimal answer requires considering six interrelated sets of variables. None are especially complex, but combining all of them is another matter."
These variables include longevity, inflation, 'the 100,000-plus possible market outcomes for a global bond and stock portfolio each year' and government pension payments.
The unknowability of the future is not necessarily a bad thing – surprisingly positive outcomes can be as probable as disasters. But Mr. Sharpe's reminder of the pitfalls and complexities regarding financial planning are a good reason to build in a financial buffer, saving significantly more than appears necessary now, into the strategy.
--Scott Barlow
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Stocks to ponder
American Hotel Properties REIT. This stock has negative price momentum. It is a limited partnership that offers investors an attractive 8.5 per cent yield, writes Jennifer Dowty. The recent price weakness may represent a buying opportunity for investors seeking income. Looking back over the past few years, when the unit price has dropped around $10, this has marked a good entry point to accumulate units.
Alacer Gold Corp. The Contra Guys recently visited this company's mine in Turkey, which is undergoing an expansion, adding a plant that can process both oxide ore and sulfide ore. The expansion should extend the mine's life by 20 years, during which time it will generate an estimated $1.6-billion (U.S.) in free cash flow, and produce roughly four million ounces of gold at a low all-in-sustaining cost of approximately $650 an ounce. Here's their bullish outlook on the stock.
Rocky Mountain Dealership Inc. This stock is seeing positive price momentum. This stock was highlighted in Inside the Market's Breakouts report over a year ago, in February, 2016, and 16 months later, the share price is up over 56 per cent. The company offers investors an attractive 4.5-per-cent yield. This microcap industrial stock is well covered on the Street and has five buy recommendations, writes Jennifer Dowty.
CanWel Building Materials Group Ltd. From a technical perspective, the stock chart for this small cap industrial stock is positive, writes Jennifer Dowty. Vancouver-based CanWel distributes building materials, lumber, and renovation products to Canadian and U.S. customers. In addition, CanWel operates a forest products company through its Jemi Fibre division. The chart for CanWel is interesting as the stock appears to be on the verge of displaying a bullish "golden cross" pattern.
Dalradian Resources Inc. From a technical perspective, the stock chart for this company appears interesting, writes Jennifer Dowty. Dalradian is a gold exploration company currently focused on developing its high-grade Curraghinalt gold project located in northern Ireland, a region with relatively low geopolitical risk. From a fundamental perspective, the stock has an unanimous buy recommendation from nine analysts. The average 12-month target price is $2.18, implying the share price has approximately 40 per cent upside potential.
The Rundown
Small-cap blues: Why Canada's Venture bourse is in the dumps
As a potential top stock pick, CanaDream Corp. ticks all the boxes. It has a couple of decades of corporate history, a respected management team, a culture of innovation, good growth prospects, a strong record of profitability and a bargain-basement valuation. But the RV rental and sales company based in Rocky View, Alta., has one key flaw – it is a small-cap stock trading on the TSX Venture exchange, which is just about enough to ensure it gets ignored. Tim Shufelt explains the great challenge facing the TSX Venture exchange.
Anyone looking for higher risk with worse returns?
The book on small cap stocks is that they offer more risk with the potential for better returns than blue chips, writes Rob Carrick. The reality over the past 10 years for small-capitalization stocks is more risk and worse returns. Investors did far better with blue chips than with smaller companies. Until global economic growth moves sustainably higher, this trend is likely to continue.
David Rosenberg: Why the loonie is ripe for a huge short-covering rally
Despite the fact that Canada's economy has emerged as the strongest in the industrialized world so far this year, the currency and the local stock market have been huge underperformers. Investors are more concerned with the possible dampening effects of shifting trade policy stateside and what a bursting of the housing bubble in large urban areas such as Vancouver and Toronto will unleash on the banking sector and the domestic economy. These concerns are way overblown, writes David Rosenberg. He also explains why he is bullish on the loonie.
Short sellers capitulate on Canada's bank stocks
Weakness in U.S. bank stocks has seen short positions on Canadian banks evaporate, helping explain relative strength in domestic financial equities, writes Scott Barlow, explaining that after a surge in hedge fund managers selling domestic bank stocks short, these positions are being covered in a hurry.
Why the Dutch auction deserves wider recognition among investors
Last week, Calgary-based oil service company Xtreme Drilling Corp. announced the result of their substantial issuer bid, also known as a Dutch auction. With a market capitalization a little over $150-million and a typical trading volume of 20,000 shares a day, it is understandable that the press release did not attract widespread attention. This is unfortunate, as a Dutch auction is a fair and effective way for a company to distribute excess cash and deserves wider recognition. Robert Tattersall explains what a Dutch auction is and why it's a good thing.
Where a risk-averse boomer couple can safely invest $300,000
A couple we'll call Roger and Angela are living the ultimate baby boomer dream of home ownership, writes Rob Carrick. They just sold a house in the Greater Toronto Area for more than two-and-a-half times what they paid in 2006. The couple will downsize to a condo in Ottawa this summer and expect to have $300,000 left over to invest. Their question: Where should they invest their money?
How a stock priced at $1,000 can turn you into a wealthy investor
When a stock hits $1,000, embrace it, writes David Berman. That's one takeaway from tracking a small group of U.S. stocks that have traded at more than $1,000 (U.S.) in recent years: Despite the sticker shock, this exclusive club of four-digit stocks has performed very well, with gains that have walloped the S&P 500. Stock in Amazon.com Inc., which closed at $1,006.73 on Friday, will now expand this admittedly small sample. The pressure is on, given the impressive track record of four companies.
Investor's trades guided by market psychology and trends
David Shvartsman started investing in 1998, "right as the dot-com bubble was about to shift into overdrive." He rode some of the Internet rockets upward and came away with the view that market psychology can be more important than detailed analyses of companies. He currently is the editor of Finance Trends.
Others
Eric Sprott buying Kirkland Lake Gold again
The Globe's stars and dogs for the week
Chart Watch: Markets inch toward major uptrend
Eye on Shorts: What bearish investors are betting against
Gordon Pape: This low-risk portfolio is up almost 11% annually
Monday's Insider Report: Nine companies insiders are buying and selling
Tuesday's Insider Report: Eight companies insiders are buying and selling
Number Crunchers
Ten large-cap Canadian stocks that may be overvalued
Ask Globe Investor
Question: I have 850 shares of the Big Five banks in my registered retirement savings plan and my goal is to get to 1,000 shares – 200 of each bank – and then stop acquiring banks and use them as a source of income to buy other dividend stocks. My RRSP is currently worth about $150,000 and has several other stocks including BCE, Algonquin Power & Utilities, Suncor and TransCanada. Is this a bad idea going forward?
Answer: In a recent column, I quoted a portfolio manager who suggested that, for proper diversification, investors should allocate no more than 20 per cent of their equity portfolio to banks. Based on the information you have provided, it appears that about half of your portfolio is devoted to bank stocks. So your bank exposure is roughly 2 1/2 times higher than it should be, at least according to this rule of thumb.
Granted, you are planning to buy other stocks with your bank dividends. However, unless you also plan to add new money to your RRSP, the $6,000 or so of dividend income that your RRSP generates annually (assuming a 4-per-cent dividend yield on your $150,000 portfolio) won't move the needle much on your bank exposure. As a result, you could remain overexposed to banks for years, which would leave you vulnerable should the sector run into trouble from a housing bust or some other crisis.
I would also point out that buying 200 shares of each bank won't give you equal exposure to the Big Five. For example, based on current market prices, 200 shares of Canadian Imperial Bank of Commerce (the bank with the highest share price) is worth about 63 per cent more than 200 shares of Toronto-Dominion Bank (the bank with the lowest share price). So your 1,000-share bank portfolio would have significantly more exposure to CIBC than to TD. Remember, it's the dollars invested that matter, not the number of shares.
I applaud you for coming up with a plan to guide your investing decisions. Most people don't do that. However, I can't see a compelling reason that you should acquire 200 shares of each bank before you begin to properly diversify your portfolio. You can diversify right now by allocating more of your capital to other sectors. What's more, because your banks are held in an RRSP there will be no tax consequences if you decide to sell some shares.
-- John Heinzl
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What's up in the days ahead
This week, John Heinzl gives his opinion on whether dividend investors should consider buying BRP. The power sports vehicles maker gave an encouraging outlook last week as it announced its first ever dividend, sending its shares rallying. Also, David Berman provides his insight on whether CAE is trading too high for investors to now get in, and growth investor Chris Umiastowski tells us whether he's sticking with Amazon after the tech giant broke through the $1,000 (U.S.) per share barrier last week.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Gillian Livingston