With continuing turbulence in the markets, investors find themselves questioning long-cherished beliefs. But there are risks in abandoning a strategy, say experts.
Joel Clark, a chartered financial analyst, is the managing partner of the private client team, a portfolio manager and a director at KJ Harrison & Partners Inc. He answered reader's questions during this live online discussion.
Joel has more than 12 years of experience in the investment industry. Before joining KJH in 2002, he worked at Canadian Mortgage Capital Corporation. He received a Bachelor of Business Administration degree from Acadia University and has earned his Chartered Financial Analyst (CFA) designation.
The following is an edited transcript of the discussion (You can also see how the Q&A originally appeared in the window below).
Akbar: For plans like RDSP where Government grants and bonds are pretty handsome, do you recommend holding highly volatile stocks like IT in the current market?
Joel Clark, KJH: Given that RESPs have a shorter time horizon and have a specific goal (kids education) its important to keep asset mix conservative. Although IT (assuming you mean tech stocks) are equities, it gets down to the type of tech stock you mean. I would say Intel or MSFT is a safer tech stock then venture tech idea.
Guest: My fiancee and I are in our mid twenties and recently purchased a house. With the extra income we have leftover each month, which percentage would you recommend be put towards long term investing and which percentage should be put towards paying down our mortgage sooner (via double up payments).
Joel Clark, KJH: Although most people would disagree with me, I would say that given the level of uncertainty today and for the next 5 years, I would be aggressively taking all your available free cash flow and reduce your mortgage. My sense is that interest rates are going to be widely higher in 5 years and value of Canadian real estate will be flat to down. I would make paying down debt your top priority.
John R: After pulling out half of my portfolio last July, which is held in a self directed RRSP account, is this the time to venture back in to the market or is there another option to park those funds in a safe holding place with some sort of return until the global economic outlook improves somewhat?
Joel Clark, KJH: In the short-term I would wait as there has been a very big rally off the October 2011 low. My sense is there is about to be a bit more pain in next month with Europe that will provide you with a better opportunity.
Grant: I presently hold in my Mutual Fund RRSP 100% Equity. Equity is 50% Can / 40%US / 10%INT I hold 25% of the total RSP value in non registered cash (high interest savings) I plan to add to the INT Exposure for the next 2 years After 2 years I plan to continually add exposure to Bonds until retirement in 13 years to reach a target of 50% Equity/50% Bonds I also am starting a TFSA this year with ETF"S holding CAN + US Div Stocks, REITS and Utilities. I may also add Bond or GIC exposure to the TFSA. Your comments please on my strategy.
Joel Clark, KJH: Generally, I think you are heading in the right direction. however, in the long-term I am worried about bonds given the 30 year outperformance in this asset class is near its end. once yields start to go the other way, it becomes an up hill battle.
Guest 2: For someone close to retirement say in 2-5 years would you be better off getting out of equities and investing in bonds?
Joel Clark, KJH: I think that is a big mistake. Bonds are setting up to become one of the worst 3, 5, 10, 20 year decisions one could make. plus once inflation starts to cook, you will need the inflation protection you get from dividend equities to offset this. given today's low yields 10 year less than 2% on an after inflation, after tax basis you are depleting capital in an entire bond portfolio.
Geoff I: If someone has a defined benefit pension plan, can you consider this fixed income in the sense that you can therefore put your non registered investments all (100%) in stocks?
Joel Clark, KJH: Not really - first consideration is the credit behind the pension plan - how financial sound the company is and funded the pension plan. The second consideration would be how much coverage your pension income is versus your lifestyle. Having said that if the world really got into trouble both the company behind the plan and the proposed equity portfolio would be at risk - best to take a more balanced approach.
Patrick: Would you recommend near the money options (calls and puts) to handle these volatile markets?
Joel Clark, KJH: Options are a pro's game so this may be hard to successfully execute but as a rule of thumb I would buy volatility when things look safe and sell volatility when at extremes.
Karen: Re: long term equity investing with dividend stocks, what is your opinion about this statement "don't be afraid to reverse course sometimes and take a few profits...this is no longer a pure buy and hold world". The current volatility has me thinking this may be true.
Joel Clark, KJH: I would agree with this statement. I believe we are still going through the great deleveraging which has multiple years to go. I don't think we are in a new bull market so would take profits when securities become fully valued. Investing from the cash side versus fully invested at all times is our operative position.
Jason: I've recently moved $45K of from non-registered Mututal Funds to a stock trading account and have since purchased $30K of large-cap Canadian stocks with dividend yields averaging 3-4%. I have yet to purchase any Canadian banks. Is it a good idea to purchase CDN bank stocks now? or wait a few months to see how the European crisis pans out?
Joel Clark, KJH: Timing things in the short-term is tough but historically the Canadian banks have been good investments over long periods of times. having said that if the Canadian real estate market and economy got allot worse (has avoided much paid up until now), cad banks would be challenged.
Grant: In consideration of the outperformance of bonds how would you suggest balancing a portfolio to reduce the risk?
Joel Clark, KJH: I would choose cash over bonds despite earning nothing with the goal of taking advantage of extreme pessimism once it rears its ugly head again.
Khan: For a portfolio of 20,000 cash, how would you start a moderate conservative portfolio in the current market?
Joel Clark, KJH: I would buy a balanced ETF (North-American focused).
Brett: In a city with very low vacancy rates, how do you feel about purchasing rental properties, as opposed to investing in mutual funds?
Joel Clark, KJH: I think buying Canadian rental properties that are fully occupied at low cap rates are potentially risky but it depends which mutual fund you were referring to.
Grant: Any thoughts on the Blackrock/Claymore deal and how this will affect investors?
Joel Clark, KJH: Blackrock is a great company so I think the fact they bought it is a good thing and investors should feel good about that.
Robert: I had my portfolio impacted by 20% over the last year. I had my money in Canadian equities and it was continuing to drop. Changed it to the money market and remained flat. Recently I changed it to 100% US bonds and it's up one day down another. My investments are RRSPs and my investments strategy is for 25 years until I retire. Where should I be placing my investments?
Joel Clark, KJH: I'd say you are zigging when you should be zagging, especially given your time horizon which is quite long, you should try to ignore and react to the volatility. having said that given my 5 year concerns I would lean more to the conservative side, but 100% bonds is potentially risky, too.
Bruce: I am looking to invest in dividend paying stock to start building other income for retirement (in 10 years) Where can a person get the best research on Canadian stocks and should I set up a DRIP for now and change to paying cash later in retirement years?
Joel Clark, KJH: I'm not sure where the best research is - very stock specific and sector specific plus we rely on our own research as the street tends to be quite biased. Re-investing dividends is a smart strategy.
Mark Iradian: I just got a new job and plan on getting a home with 3 or 4 years. I'm under 30 years old, so I understand I have a lot time under my belt. What type of asset mix should I be aiming for asset growth?
Joel Clark, KJH: If your savings is for the equity in your new home then keep in near cash, as that will ensure it is there when you need it. if it is in your rrsp I would take a more balanced and long-term approach.
Grant: Your outlook for Global Real Estate for a long term investment?
Joel Clark, KJH: If you mean in the private market then its hard because successful real estate investing requires good local knowledge - obviously the US is an interesting area given in some states prices are down 50% so represent good value. hard to make a general statement about global real estate.
Guest: What do you think with investment portfolio of 60% in financial stocks (common and pref) with 20-30 years horizon?
Joel Clark, KJH: Without knowing your entire personal details and the financial stocks you are referring to I'd say that's aggressive. I think the prefs are quite over valued.
Guest: I manage my 79 year old father's RRIF. He only has about $71 000 left in the account, so don't want to be too risky. Have him $20 000 in BMO monthly income fund and mixture of ETFs, including $20 000 in monthly income ETFS (ZMI, XTR), $10 000 in short corporate bond ETFs, $3400 in Cdn preferred shares ETF, $3 000 in horizons enhanced income ETFs (HEX and HES.UN) Given your comments about interest rates and bonds in future, am I still okay with my dad's asset allocation?
Joel Clark, KJH: Not knowing his drawn-down rate, it's tough. Given his age historically that's the right allocation probably but you might experience some mark to market volatility in those bonds funds. owning direct bonds that have a maturity payment would be safer.
Myra: I just sold $20,000 of my position in the MSCI ETF at a loss of 10%. Do you think this was a wise move considering the on going volatility of the markets and the European debt crisis? I'm not sure what to do with that U.S. cash now. Any suggestions?
Joel Clark, KJH: Hard to answer not knowing your full picture - the economic issues and volatility will be with us for quite some time so if its unsettling to you then keep it conservative.
Gordon: Is it too late to invest in utilities and REITS generally ? Are they fully valued ?
Joel Clark, KJH: They are more fully valued then less - so risk-reward isn't so favourable.
Grant: Your views on annuities?
Joel Clark, KJH: Extremely over-valued, given buying them at 30-year low in interest rates.
Chris: Can you explain how preferred shares will react, generally speaking, in a rising interest rate environment?
Joel Clark, KJH: If they are perpetual preferreds then they will go down as they are effectively a bond without a maturity - in a rising interest rate environment they are the most risky thing one could own.
Mike: What approach to performing detailed due diligence on company executives/senior level management can you recommend?
Joel Clark, KJH: I would start with searching the internet for news but on a more granular basis would talk to industry folk who would have a sense of reputation and competence.
Ggg: You say bonds are a bad move right now. What about a bond mutual fund?
Joel Clark, KJH: Even worse, as no effective maturity - act like a perpetual bond.
Gordon: Are there any sectors that you currently recommend?
Joel Clark, KJH: As a value investor, I am attracted to U.S. financials, especially the high quality ones, as well as the automotive sector.
Guest: Your opinion on index funds? I recently switched them. My allocation is 22% Cdn, 22% U.S., 16% Int & remaining 40% in bonds.
Joel Clark, KJH: Version of lower cost mutual funds but you still need to get the timing right in the short to medium term.
Grant: How hard will 1-5 year bond funds be hit when interest rates rise?
Joel Clark, KJH: Not much, especially given that 20% rolls off every year.
Grant: I often hear that you can't stay in cash because you are losing money to inflation, what is one supposed to do?
Joel Clark, KJH: Depends on your time horizon but over long periods of time the equity market has been the best performing asset class as it reflects wealth creation.
Guest: Views on gold in the near future?
Joel Clark, KJH: I'm not a gold bug so keep this in mind but given governments around the world are reflating like mad, this is when gold should shine - question of whether in the price already.
David: For an extremely long term investment how does MSCI EAFE and Emerging markets ETFs look for non-U.S. international exposure?
Joel Clark, KJH: We are North American focused so can't really comment but I'd prefer a North American company that operates in emerging countries versus an emerging country stock - better transparency and more stable laws.
Chris: Some Mutual Funds and ETFs invest in senior secured bank loans. Those loans float, resetting roughly every 3 months. That sort of investment won't be highly impacted by a rising interest rate environment. Correct?
Joel Clark, KJH: Correct, as they reset as rates rise.
Grant: Your thoughts on balancing a portfolio with a broad commodities ETF and what percentage?
Joel Clark, KJH: Commodities are risky and volatile plus they are self correcting as prices rise higher cost production comes on providing more supply - they are meant to be bought and sold.