Summer is a time for many of us to take some time off. We head off to the cottage, we travel, and we spend more time with our families, all with the intention of winding down and enjoying the good weather.
However, lately it seems that this laid back approach has affected investors and the markets as well. For the last month or so, the North American markets seem to be trading in a range. With no apparent direction, the trading volumes are low, and investors and corporations are sitting on the sidelines for the most part, holding on to cash positions. With this market environment seemingly here to stay for a while, how should investors look at their portfolios and what options do they have with a market struggling for direction?
The answers to these questions, I believe, are determined by your time horizon, your risk tolerance and your personal goals. Do you have a short- or long-term time horizon to obtain those goals? Can you handle higher risk, or is it low risk you are most comfortable with? Lastly, can you achieve your goals with a low risk portfolio paying you perhaps three or four per cent in a short time span? The answers to these questions will dictate what you need to do in this environment.
If you happen to be an investor that does not like the current stock market, what are your other options? Real estate is something many investors ask about quite often, which is an asset class that should, if possible, be part of a diversified portfolio in some capacity.
However, in my opinion, I am somewhat concerned about our real estate markets because we have not seen a significant pullback in real estate in about 15 years or so. If the economy does hit a soft patch in the next few years, I believe real estate could be hit the hardest. After you factor in the new HST, new rules on buying homes, higher property taxes in some major cities and higher interest rates, I believe we could see this market fall substantially. If you are comparing the real estate market, which is coming off its high, to the investment markets, which are coming off their lows, I feel you have more risk in the real estate market going forward.
Some investors ask me about gold or other hard assets as an investment option. Investors sometimes forget, but gold is one of the riskiest investments you could have in your portfolio. One day the price of gold can be $1,260 an ounce, and a few weeks later it can be worth less than $1,200 an ounce. I personally don’t believe there are any major global crises at this time, nor do I believe the U.S. dollar is in danger of losing its dominant status, thus I will not be overemphasizing gold in any portfolios. However, I do recommend having some gold in your portfolio for diversification purposes.
What about bonds or GICs as an alternative to the stock market? This asset class is usually considered lower risk and you can receive regular and predictable income from it. The problem with this asset class is, if your goals dictate that you need to make more than four per cent on your investments, this will be hard to obtain through bonds or GICs, given today’s extremely low interest rates. Obtaining three or four per cent is possible, but anything above that would not be possible in most cases (staying with low risk investment grade bonds).
Some investors have said that because the market is so volatile, they are looking to maximize payments on their mortgage instead of investing. The one thing to keep in mind when trying to pay off your mortgage quicker is that you are investing in real estate (your house). If this is all you are doing, then you are saying your house will appreciate in value more than any other investment. I again question this because I do not believe the price of housing is going up as much as it did in the past few years. I think we have peaked for the time being and I can envision most houses staying at the same value or possibly even dropping over the coming years.
Therefore, at this time, I continue to recommend investors stay the course and own investments that match your goals and objectives. If you are looking for growth, I recommend you continue to invest in the best and cheapest investments you can find regardless of market volatility. If you are looking for capital preservation, then it is the bond market you need to move into — expect returns of four per cent or less on investment grade bonds. If you are looking for growth but wish to stay conservative, there are safe ways to invest through dividend-paying mutual funds and stocks rather than buying high-flying tech stocks or commodities. For those that can handle volatility, take a look at commodities, oil and tech. As was the case at the end of 2008, there are a lot of investments that appear cheap today. There are many companies doing very well that have had their stock price fall due to global macro events beyond their control. Those investors that have the cash available and have the risk tolerance to invest in this climate could potentially be rewarded as they were last year.
If you have any questions regarding the above article or are looking for an Investment Advisor to help you with your portfolio, please send me an email at asmall@dundeesecurities.com. I will be glad to speak with you!
Allan Small is an Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities and the author is not a Dundee Securities analyst. The views expressed are those of the author alone, and are not necessarily those of Dundee Securities or Metro Canada.
