PROTECTING PORTFOLIOS WHILE GENERATING INCOME AND/OR GROWTH
Many ‘investors’ (or those forced to be investors) are probably exposed to a significantly higher amount of corporate bonds, income paying equities and even growth equities than ever before as they look for INCOME to meet their needs as well as returns higher than 5 year GIC’s (2%).
In 1995 you could achieve a 7.5% average return by owning nothing but bonds and GIC’s. 10 years later you had to have 50% exposure to equities in order to achieve and average of 7.5%. In 2015 (and now) you can only have a 10-12% exposure to bonds if you hope to average 7.5%.
While the average return may be similar in these time frames the VOLATILTY (standard deviation) is much greater now than in 1995. A person trying to get 7.5% as an average will hardly ever get 7.5% in a calendar year. Two thirds of the time their returns will be between negative 9.7% or positive 24.7%. Another 1.3 of the time the return will be between positive 41 and negative 26.7%. THAT IS THE PRICE YOU PAY TO ACHIEVE AN AVERAGE RETURN OF 7.5% IN A LOW INTEREST RATE WORLD.
Targeting a lower average rate of return will reduce the VOLATILTY and that is an option for many people…BUT not everyone.
I have listed some suggestions that allow you to target a higher rate of return BUT minimize/reduce portfolio volatility. The first suggestion is my favorite:
STOP opening statements. For those that feel the need to open statements I have some additional suggestions
We have completed our investigation of the Scotia Bank ‘NOTES’ and believe that they will go a long way to targeting a 6-8% annual return and/or income stream AND minimize volatility of capital SIGNIFICANTLY. I am suggesting a 5-6% allocation to these notes at this time. These notes protect the capital up to a decline of 25% over a 5-6 year period.
Less capital in investment grade bond funds and HIGHER ALLOCATION to government of Canada LONG bonds using I-shares-XLB. This ETF (exchange treaded fund) will pay an income of 3.55% and add significant protection in a RECESSION LED MARKET DECLINE.
TREZ short term commercial mortgage fund continues to generate returns in the 4.5% range will ZERO VOLATILITY of capital OVER THE LAST 10 YEARS. 3% is paid out as quarterly distributions and a year-end top up completes the total distribution. TREZ also has a fund targeting 6 and 8% returns that have a larger allocation to the United States and residential real estate in the United States (minimum $10,000 investment and 30 day liquidity).
DIVERSIFICATION-DIVERSIFICATION-DIVERSIFICATION even in fixed income (GIC, government bonds, corporate bonds, high yield bonds, preferred shares)
I encourage clients to take the time to come in and review their portfolio and target return goals to ENSURE that all measures are being taken to minimize risk/volatility while achieving the average return OVER 5 YEAR PERIODS. If you cannot come in at this time REQUEST by e-mail a review of your portfolio and I will send you out a PERSONALIZED review with suggestions (if required) or call us to book an appointment!
The views expressed do not necessarily reflect the opinion of Argosy Securities Inc. This does not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. Please consult a professional before making an investment decision.