A long-term focus is essential for portfolio returns because of the magic of compounding – the gains from one year are added to the total and become part of the investing principal that (hopefully) grows the next year.
That seems straightforward, but, using Warren Buffett terms, in practice it’s “simple but not easy.” As venture capitalist and finance author Morgan Housel noted in How to Do Long Term, it’s analogous to standing at the bottom of Mount Everest as indicating the peak as the end destination. Thinking long-term is a goal that takes constant and significant effort.
Mr. Housel provides useful perspective to help investors keep their financial end goals in sight. His first recommendation is that investors recognize that a long term outlook requires “[enduring] a neverending parade of nonsense.”
Another term for nonsense here is “market noise” – fixations and punditry on events and trends that have little or no bearing on decade-long equity market returns. Mr. Housel has previously advised investors to ignore any issue that they likely won’t care about a year later.
The column also notes that while an extended investing time horizon can provide solace in times of volatility, it also means that more apparently-disastrous market events are likely.
Mr. Housel also warns that a long-term investing can be just as subject to chance as a short term trading. He notes that an investor with a 10-year time horizon in early 2010 would have done great until 2020 when the pandemic hit and most of the gains were wiped out. The ability to maintain focus on financial goals during these periods is a key element of investing.
Academic research has shown a consistent inverse correlation between number of portfolio transactions and returns – the more an investor buys or sells assets to react to short term volatility, the lower the performance over time. This is another reason to maintain a longer-term perspective.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Converge Technology Solutions Corp. (CTS-T) This technology stock has delivered spectacular sales and earnings growth combined with stellar returns to its shareholders. Year-to-date, the share price is up 74 per cent, closing a record high of $8.61 on June 8. Jennifer Dowty breaks it down.
Trillium Therapeutics Inc. (TRIL-T) Investors are turning positive again on the clinical-stage cancer-treatment company, a stock that lost ground following a huge run-up last year. Brenda Bouw looks at why.
Caesarstone Ltd. (CSTE-Q) The company is a global leader in quartz countertops, and its Lioli subsidiary is a key player in the porcelain countertop business. If you’ve recently bought a new home or renovated your kitchen or bathroom, chances are you’ve seen, admired or even purchased their products. Yet, you probably wouldn’t know it was a Caesarstone product, even though the countertops are right in front of you, writes Philip MacKellar.
Canada’s Big Six bank stocks aren’t cheap any more, but sector trends look favourable
The share prices of Canada’s Big Six banks reached record highs after the banks finished reporting their quarterly financial results last week, raising the question of how much further this rally can go as valuations rise. David Berman looks at the state of the sector.
A financially secure senior asks: Why should I even consider investing in stocks?
You invest in stocks to grow your money. But what if you have enough already? An eightysomething reader asked this question recently, and Rob Carrick examines the dilemma.
Others (for subscribers)
Wednesday’s Insider Report: CEOs are selling these two bank stocks
Tuesday’s Insider Report: Director invests nearly $800,000 in this large-cap stock that’s rallied 48% in 2021
Others (for everyone)
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Ask Globe Investor
Question: In February, I purchased 150 shares of Enterprise Products, a U.S. oil and gas infrastructure company, in my registered retirement income fund. I was expecting a dividend yield of about 7.6 per cent. However, I was surprised to see that the quarterly dividend of 45 US cents a share was reduced by a non-resident withholding tax, so instead of receiving US$67.50 in dividends I ended up with US$42.53. Why am I paying withholding tax? I have held other U.S. dividend stocks for years and have not encountered this.
Answer: I hate to give you another surprise, but Enterprise Products Partners LP (EPD-NYSE) is not a dividend stock. It’s a U.S. master limited partnership (MLP) that is subject to different tax rules than a regular corporation. Instead of paying tax at the corporate level, MLPs – many of which operate in the energy business – distribute most of their cash to unitholders.
For U.S. investors, one advantage of MLPs is that their distributions (they are not called dividends) consist largely of return of capital (ROC), which is not taxed in the year it is received. Rather, ROC is deducted from the adjusted cost base of the units, which defers tax until the units are ultimately sold.
For Canadian residents, however, the tax treatment of MLPs is far less favourable. In addition to being treated as foreign income and losing the tax-deferral benefit, MLP distributions are subject to non-resident U.S. withholding tax at the highest U.S. federal marginal rate, which is currently 37 per cent.
What’s more, withholding tax applies whether the units are held in a registered or non-registered account. This differs from U.S. dividend stocks, which – under the Canada-U.S. tax treaty – are exempt from withholding tax in registered retirement accounts and benefit from a reduced withholding rate of 15 per cent in non-registered accounts, tax-free savings accounts and registered education savings plans.
There’s even more bad news. Because you hold your units in a registered account, you are not able to claim a foreign tax credit for the tax withheld. Even if you held the units in a non-registered account, the process of claiming a foreign tax credit for MLPs can be complex and may require the filing of a U.S. tax return, as I have written previously.
“We believe that Master Limited Partnerships are not the right investment for everyone. There are risks and tax-reporting issues that need to be fully understood before an investor considers owning an MLP,” Robin Diedrich, an analyst with Edward Jones, said in a recent note.
In recent years, the MLP sector has “significantly lagged” the broader U.S. market, Ms. Diedrich said. Low commodity prices and distribution cuts by several MLPs have hurt sentiment toward the sector, and investors have become less enamoured of the MLP financing model, “which relies on continual equity and debt issuance to fund growth capital,” she said.
Bottom line: Make sure you understand what you are getting into before you jump at the high yields of U.S. MLPs.
-- John Heinzl
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Compiled by Globe Investor Staff