Analysis from the Movement Capital investing site underscores the importance of Sequence Risk – the timing of large portfolio losses - in no uncertain terms.
“One portfolio risk to rule them all” provides scenario analysis in which three different investors (named after Lord of the Rings characters for some inexplicable reason) start with an identical $2-million dollars, earn the same seven per cent return each year, and take out $125,000 per year.
Each of these hypothetical investors takes a 25 per cent loss on their portfolio, only at different times. Frodo doesn’t take the loss until 30 years after investing, Sam’s portfolio gets hit after 15 years, and Gandalf endures the 25 per cent drawdown immediately.
The results are shown in a chart I posted on social media here. Gandalf, who took the loss early, has the value of his holdings go to zero before year 25. Sam, who took the loss 15 years into his investment career, winds up with less than $1.5-million at the end of three decades. Frodo winds up with a portfolio just over the initial book value of $2-million.
There are numerous investor takeaways from these examples. For one, younger investors with longer time horizons are often encouraged to accept more portfolio risk, but Movement Capital’s work shows the importance of avoiding big losses while they do so.
The importance of compounding returns is also restated in the hypothetical scenario. Protecting asset values in the near term and steadily building assets pays off at the end of the process, with the largest sums generating high annual returns.
Investors have little control over the timing of losses – bear markets occur without respect to the stage of life of individual investors. The scenarios provided above are helpful, however, in guiding investors’ reaction to losses no matter what stage of the investment life they’re in.
-- Scott Barlow, Globe and Mail market strategist
This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.
Stocks to ponder
Héroux-Devtek Inc. Longueuil, Que. based-Héroux-Devtek is involved in the design, development, manufacturing, and repair of landing gear systems and aerospace components. This company’s share price climbed to a record closing high on Feb. 7. However, over the past seven trading days, the share price has fallen 8 per cent. Jennifer Dowty has a stock profile.
Berkshire Hathaway Inc. If the past few years are any guide, Warren Buffett’s annual letter on Saturday will serve up a sprinkling of folksy humour while stonewalling anyone who wants a clearer picture of what lies ahead for Mr. Buffett’s byzantine empire. This non-disclosure disclosure has become a frustrating February ritual for shareholders of Berkshire Hathaway Inc., Mr. Buffett’s flagship company. However, people in search of a bargain may want to get over their annoyance. Despite its murkiness on some key issues, Berkshire stands out as one of the few reasonably priced corners of an expensive U.S. stock market. Ian McGugan explains.
This is the Canadian bank stock most likely to soar this earnings season
Canadian banks are fairly priced for the slow growth economy but there’s still potential for stock prices to rally this earnings’ season, according to Ebrahim Poonawala, bank analyst at B of A Securities. The belief at B of A Securities is that profit expectations for the domestic banks have been slashed to the point where odds are greater for positive surprises in coming earnings than negative ones, making it likely that stocks will gain over the next couple of weeks. It highlights one Canadian bank in particular poised for gains. Scott Barlow reports
Rob Carrick’s 2020 ETF Buyer’s Guide: Best U.S. equity funds
There were no bad choices for ETF investors in the U.S. equity category last year. Every single exchange-traded fund listed in the U.S. equity installment of the 2020 Globe and Mail ETF Buyer’s Guide made between 20 and 30 per cent in the 12 months to Jan. 31, and the three- and five-year returns were all in double digits. Want a likely path to investing disappointment? Buy a U.S. equity ETF based on those backward-looking return numbers. Dig into the other data in this installment of the Buyer’s Guide if you want to understand how these ETFs might behave in the future.
Five little-known TSX Venture stocks that have been making a killing for investors
The TSX Venture Exchange this week released its annual Venture 50 list, showcasing the fastest-growing stocks in the Canadian small-cap space. Those 50 stocks returned an average of 123 per cent in 2019, which is a mark topped by only nine names in the S&P/TSX Composite Index. Tim Shufelt reports on some of the top gainers.
Investors, it’s time for caution: cracks are appearing in consumer spending
In Canada and the United States, stock markets are in high spirits. Sadly, many consumers aren’t. Investors should keep a close eye on this discrepancy. Ian McGugan reports.
Others (for subscribers)
Friday’s Insider Report: Directors buy after this dividend stock nosedived
Number Cruncher: Nineteen TSX dividend stocks where ‘free cash flow is king’
Others (for everyone)
Are you a financial advisor? Register for Globe Advisor (www.globeadvisor.com) for free daily and weekly newsletters, in-depth industry coverage and analysis, and access to ProStation - a powerful tool to help you manage your clients’’ portfolios.
What’s up in the days ahead
John Heinzl is spending more of his dividend cash. We’ll tell you what he’s buying.
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.
You may also be interested in our Market Update or Carrick on Money newsletters. Explore them on our newsletter signup page.
Compiled by Globe Investor Staff