How to invest in a bear market, two
September 25 2008 by Ellen Roseman
When I started this conversation in late July, I didn’t expect things would go off the rails so quickly. Now the United States is trying to push through a $700 billion (U.S.) bailout of financial institutions that may not even stem the tide of bad loans and bad paper.
Stay the course. Think long term. That’s the main message you get from your financial advisers if they bother to call or write during this crisis. Many don’t, according to consultant Dan Richards.
I have a financial adviser for my RRSPs, who called me twice last week. She said my portfolio looked good. She did agree to change a couple of my riskier holdings, at my suggestion.
I also have a self-directed account, where I also made a few changes. I realized that I should be taking some of my gains off the table. So I sold half of the stocks that were up substantially.
It’s hard to stand by and do nothing when markets are so uncertain. Working in the media, getting all the news and rumours, I find it hard not to worry when this crisis seems worse than others that have preceded it. But with the cash in my account, I’m also buying a few stocks that seem depressed.
Last week, I wrote about Ted Rechtshaffen, a certified financial planner who has borrowed more than he needs for a new house and is buying stocks with leverage. He has an update for me below.
Now that things are bad, are you staying the course? Or are you wavering? Please keep the comments coming.
Ted Rechtshaffen, TriDelta Financial
Sep 25 2008
I read your Wednesday column online and saw a comment below from one of your readers:
“Good Luck Mr. Rechtshaffen. My investment philosophy is much conservative than yours. Can the Star update us how his portfolio make out 6 months from now?”
I would be happy to send you an update quarterly if you thought it might be of any interest.
There are two versions I would send you. The first would be with a portfolio with 1/5 invested in each big bank on the morning of Wednesday, Sept. 17th. This is what was implied in the article.
The other would be a portfolio that is closer to my actual investments for these funds. It is a little more diversified by sector but not by number of stocks:
Russel Metals, Rothmans, BMO and CIBC.
For what it is worth, the bank portfolio was up 4.24% (not including interest costs and dividends) from Sept. 17 to Sept. 22.
The four-stock dividend portfolio was up 0.6% (not including interest costs and dividends.
HG
Sep 25 2008
Today’s article, http://www.thestar.ca/comment/columnists/article/502801, hit the proverbial nail on the head, as usual. How does an investor find a truly independent 2nd opinion? What should the client do considering behavioral finance influences?
Tough choices. I think it interesting that none of my friends or colleagues who are in non-day-trading relationships have been contacted by their advisors this week. What are the advisors waiting for? Panic instructions? Stress overload?
Hopefully the retail investor will not be devastated by following normal human instinct when they learn that no-risk or low-risk mutual funds and stocks and portfolios are often misnomers.
Keep up the great work.
RF
Sep 25 2008
As I understand it, funds such as TD’s International Index Currency Neutral Fund are supposed to directly mirror [and its unit price be determined on] the actual performance of international equity market indices they follow/hold, and eliminate substantially the Fund’s foreign currency exposure.
The basket of international markets this fund tracks daily [and which its unit value is calculated upon] are such as: Hong Kong’s Hang Seng; Japan’s Nikkei 225; France’s CAC; Germany’s DAX; and UK’s FTSE 100.
As with other index funds, the concept is simple and predictable. If the market(s) the fund tracks/holds close down for the day, the fund’s unit value will be down, and vice versa.
For instance, TD’s Canadian Index Fund’s unit price is based on that day’s activity/close of the S&P/TSX composite market (it doesn’t follow or take into account the oversea markets, or even the US S&P 500 for that matter).
On Wednesday, Sept. 17, after the close of all the overseas markets, and after a down day for each, the TD’s International Index Currency Neutral Fund was determined/priced with a down unit value at $5.72. That much I can understand and makes sense.
What I don’t understand and which makes no sense to me is that the following day, when all those overseas markets again closed down, the fund’s unit value was priced way up at $5.98. How can that possibly be?
In complete contrast, I note RBC’s International Index Currency Neutral Fund, unlike TD’s same fund on the same day, was priced down at $7.32 as its Sept. 18th closing unit value.
Similarly, BMO’s International Index Fund was priced down at $7.53 as its Sept. 18th closing unit value. As the oversea markets were down, those funds’ determination of their closing unit values seems transparent.
How can it be that three very similar international index funds use the same benchmark and track the very same overseas indices for the very same day [and when those markets closed lower]… yet one fund closes up (+ 4.0%) and the other funds down (- 1.0%) from their previous day’s posted closing unit values?
Given the foregoing, and the TD’s fund’s mandate, does TD’s international index fund track the actual performance/close of the indices it holds/follows and, if not, why not ? In fact, how, and based on what, is this TD Fund’s daily unit value calculated/determined?
It doesn’t seem transparent to me.
AV
Sep 25 2008
I want to share my experience in my investment journey. I finally feel confident that I am in a better condition than ever, despite the rollercoaster markets.
I’m starting to think there is a big lie about RRSPs. For the majority, they never really accumulate to anything.
The claim is that $10,000 invested for ten years at 10% will compound to $1 million by your retirement! More like $10,000 with an annual return of 1.5%, less MER (and eventual switching fees when you can’t take it any more)!
The whole thing is worth about $12,000 when you retire and makes the mutual fund companies very wealthy and actually then keeps you working. And so many of us are afraid to reveal to anyone how poorly our investments have done.
My retired mother-in-law is a very private woman. She doesn’t say much but has told me that her stock portfolio of IBM, Royal Bank, TD, etc. with dividends reinvested has done very well over the years.
My stubborn insistence to listen to her but not hear — and continue to buy the mutual fund of the moment (Labour Sponsored Funds, here I come!) — has cost me.
In July 2005, without any other reason other than she had done well (as much as I argued otherwise), I started slowly buying stock, not mutual funds, such as Royal Bank and TD. I slowly expanded to other companies and enrolled in DRIPS for some.
But the defining time for me was purchasing the Ultimate Dividend Playbook by Josh Peters of Morningstar in August 2007 (after the first hit of subprime to the markets).
http://www.amazon.com/Ultimate-Dividend-Playbook-Independence-Investor/dp/0470125128
His book and methodology just clicked in with how I viewed investing in real estate. I never have bought real estate for appreciation. I knew it would happen (and it has) but I bought real estate for income.
If the value of my buildings went down 30%, the amount of my rents paid to me by tenants wouldn’t change. If I chose to give them a small increase in rents year after year above my increasing utility costs, I simply made more income.
It doesn’t matter at all what the current value of my buildings are on the market because I am not selling. If I applied this same approach to good quality dividend paying stocks, I would have the same secure income. Each time the company increases its dividend payout, the yield on my original purchase is higher. You just have to be patient.
Josh Peters’ book was published in May 2007. When I looked at his recommendations in the book and computed the yields, (dividends divided by the price of the stock), I was shocked at how much higher the yields were in August 2007. It was as if the tanking markets were giving me the opportunity to buy good quality companies at 1-3% higher yields than he was recommending (already a good value).
So that’s it. Buy good dividend paying companies that have strong balance sheets, income statements and growth. Hold those stocks. Enroll in DRIPS or reinvest the dividends in other good paying companies.
Last Monday and Tuesday, with the market dropping again, I received 3 dividend payouts and bought more of GE at over a 5% yield!
I have never felt more secure in my portfolio. I have only 2 regrets. I wish I had started doing this 20 years ago and I wish I didn’t have the remaining mutual funds that I don’t want to sell yet due to high fees.
Mike Macdonald, Second Opinion Investor Services
Sep 25 2008
I was talking with an experienced advisor, who had just come off a conference call at one of the big bank-owned brokerages.
He was confident the end was near because they were showing increased evidence of retail investors leaving instructions to “sell it all”!
Unfortunately that often is a result of bad selling and worse communication by the advisor to the unfortunate investor.
This advisor saw it as an inevitable result of a bad market and the large number of really bad advisors who abandon clients at times like this.
I tend to see it more as an acknowledgement that advisors have little oversight in how they handle fiduciary duty to their clients.
Jerry Hung
Sep 25 2008
Cash is king means so many things in this environment.
Our portfolio is down (whose isn’t?) but I look at this in a positive way - if we can survive this [the worst recession in recent decades], we will come out ahead and be ready for the next few decades.
Things learned include:
–Don’t invest too much in tech/financial
–I should’ve sold some profits when we have them (not be greedy), including last Friday with +800 pts
–Berkshire rocks, if one can afford the shares, ireally less volatile and a stable and safe choice
–Instead of mutual funds, invest in TD e-funds index funds to get low MERs and no commission (vs. ETF).
It is hard to observe the volatile stock market now, but if you can focus elsewhere (work, personal life, family), do that, and in a couple years hopefully all is good.
Charles in Vancouver
Sep 25 2008
RF, currency-hedged funds have inherently more tracking error because they invest in derivatives to adjust the portfolio’s performance to match currency movements. These derivatives are not perfect and sometimes they slip.
What’s complicated about the International currency-neutral fund is that each country’s contributions are hedged to that currency. So the Japanese part is hedged to the yen, the Eurozone part to the Euro, the British part to the pound, etc.
But if you track the same index (MSCI EAFE) in US dollars, all sources will report an unhedged value in US dollars. It is quite possible that the EAFE will close down one day in US$ terms, but up in currency-hedged terms.
Jaz
Sep 25 2008
Amid the panic and rumours and bad news being sold in the media, what shocks me the most is the number of advisors who don’t call their clients.
At 27 and only a few years into my career after grad school, I don’t have much in investable assets. That didn’t stop my advisor from calling me last week to check in.
In contrast, my boyfriend, seven years my senior and an executive with considerable assets available to invest, did not receive a call from his advisor and his two voicemails were ignored. He bought shares through his online self-directed account and on Monday he moved all of his assets to my advisor.
One advisor took the time to contact a small client and ended up bringing in a good amount of money. The other advisor probably isn’t hurting for this, but he will lose referrals tenfold from my boyfriend.
Of course, these advisors are busy, but a quick phone call can go a long way to earn loyalty and stop the panic.
brad
Sep 26 2008
Because I’m investing for the long term (I’m still more than 15 years from retirement and don’t have any near-term investment goals), I don’t care a whit about losses in my portfolio’s value today.
It’s not like my stock-based investments are savings accounts where you have to wait many years for interest to build back up and recoup your losses.
I still own all my shares. What they are worth today doesn’t matter. It’s what they’re worth in 20 years or so when I need the money that counts. As that day gets closer, I’ll be paying a lot more attention to the ups and downs of the market, but for now I’m staying the course.
WKG
Sep 26 2008
This comment does not really pertain to investing in a bear market. It’s more a general comment about stock markets.
I am 44 years old and my stock portfolio is off well over 1 million dollars since May. I have sold nothing at this point, but have resolved to sell some stock holdings and put this money into investments that are not stock or money market related when a recovery happens (assuming it happens in my lifetime).
I have invested in the markets seriously for about 15 years and I simply cannot get my mind around the fact that the bulk of that time has been spent waiting for the stock market to recover.
I also cannot accept the fact that seemingly profitable and reputable American companies can implode on themselves and become worthless in a very small time frame, with no consequences or implications for the greedy fools that were paid millions to run them into the ground.
Having said this, the bulk of my worth has come from the markets. I have never experienced a period when I get a nice steady return from the market. I have always been really up or really down, and there is no in between. The greatest successes that I have had have been investing in Canadian companies, mostly oil and gas.
The money that I have put onto the market in the last two years is mostly commodity related. The reason? I believe that as the USA prints more and more money, currencies all over the world are slowly going to begin to lose their relevance.
Currency is based on nothing other than how fast it can be printed.
RF
Sep 28 2008
Charles in Vancouver Sep 25 2008
I understand from your comments how International Index Currency Neutral funds operate, and that there can be some tracking error. It’s possible the EAFE markets close down one day, but the funds themselves can actually be priced up… and vice versa.
What I don’t understand is how the very similar index funds previously mentioned, if all operating on the same principle you mention, and using the same MSCI EAFE benchmark and tracking the very same oversea indices for the very same day [when those markets closed lower]… yet one fund closes up (+ 4.0%) and the other funds are down (- 1.0%) from their previous day’s posted closing unit values?
I’m confused. Are the very same funds not valuing their units in the same way ? If so, it makes comparing their returns difficult over the short term (say daily, weekly or even for the month)…