For this ‘for what it’s worth’ I am going to try to break down the various investments that make up many peoples accounts. I will try to give an idea of their current value on a statement (called price to market), the income being generated, and the future value which is some cases is the maturity value (bonds).
I will break it down into multiple assets classes going in order from LEAST VOLATILE TO MOST VOLATILE (most of the time) REMEMBER…VOLATILITY DOES NOT EQUAL LOSS OF MONEY…unless you make it so.
CASH (no drop in value but lowest income over 5 year periods)
High interest savings accounts (paying about 1.35%)
1-5 year GIC’s (paying between 2% all the way to 3% for 5 year GIC)
Cash sitting in accounts from distributions of bonds, preferred shares, income equities, and mutual funds
INVESTMENT GRADE BONDS (down about 1% year to date including the distributions)
These are bonds issued by the government and high quality corporate companies (such as banks).
10 year bond interest rates are about 2.1% right now. Bond yields have been dropping over the last few weeks
Government of Canada Benchmark Bond Yields - 10 Year
An example of this asset class would be the TD Canadian Bond Fund which is down slightly on the year but only after a recent rebound caused by interest rates coming down in Canada.
DANGER: IF INTEREST RATES INCREASE AGAIN (trade war lessons, economic date improves) then this fund will move lower AGAIN.
IF YOU BELIEVE ECONOMY WILL GET WORSE SOON, THEN INCREASE EXPOSURE TO THIS ASSET CLASS (personally I do not think economy will get worse at this time)
HIGH YIELD BONDS (FLAT ON THE YEAR including distributions) I STRONGLY BELIEVE IN THIS ASSET CLASS!!!
· These bonds pay 5-8% in interest
· More price volatility
· Less sensitive to interest rates and more sensitive to economic conditions
My clients have exposure to this sector as I believe this asset class provides good solid returns over most 5 year periods. The positive of this asset class is much higher distributions (income) than investment grade bonds BUT the negative is volatility of the current selling price. SPEND the higher income and wait for maturity to get your money back. Bonds have a maturity date!
We have some higher yielding bonds trading very close to par, some about 4-5% below par and some trading even lower. THIS IS NOT MONEY LOST…unless you sell today. Keep collecting the interest and collect your money at maturity.
If you had bought a 5 year GIC 1 year ago you would be getting 2% cash flow AND HAVE NO ACCESS TO YOUR CAPITAL!!!
HIGHER INCOME comes with the price of volatility…volatility of selling price is not money lost…unless you make it so by selling before maturity of the bond
OPPORTUNITY (blood in the streets): there are several corporate debentures (bonds) selling at a discount (below par) paying 5-7% interest issued by companies with good free cash flows (that’s good) that can be bought now giving you CAPITAL GAIN opportunities at maturity. I sent out an e-mail recently regarding this (BUYING BONDS AROUND $75 THAT MATURE AT $100)
2 of those bonds are now up 5-8% since we bought a few days ago
PREFERRED SHARES (DOWN ABOUT 15%+ YEAR TO DATE INCLUDING DISTRIBUTIONS)
SIMILAR TO 2015 (SUBSEQUENT 20% GAIN OVER NEXT 12 MONTHS)
Pay 4-5.5% distribution (dividend) collect the income and try to ignore price FLUCTUATIONS (yes I said fluctuations)
Lower tax paid on this in investment accounts
Can be sensitive to interest rates and credit conditions (economy)
Most of the preferred we own are banks and insurance companies which 2 months ago were near par ($25) and are now CURRENTLY (not permanently) selling in the $22 range IF YOU HAVE TO SELL TODAY. Yes, this effects the current value of your portfolio but you are collecting a TAX EFFICIENT income stream which is 50% + higher than a 5 year GIC. HIGHER INCOME = PRICE VOLATILITY……….have I said that before!
EVEN MORE OPPORTUNITY (more blood in the streets): there are several preferred shares that are down close to 20% that are in great business with huge cash flows (including the banks…are the banks going under?)
Buy low and sell high…easy to say BUT hard to do (fear is the mind killer) HERE IS A CHANCE TO DO THAT
Consider selling the following (for those that own):
Consider buying the following (at a big discount)
Pembina (30% discount)
Manulife (15-20% discount)
Alta Gas (30% discount)
Brookfield (20% discount) (click on this to see price change in last 60 days)
Enbridge (15-20% discount)
For a 1 ticket solution invest in PURPOSE PREFERRED SHARE FUND (investment grade quality preferred)
Many of the preferred above were trading in the $25 range just 45 days ago…not that much in the world has changed in the last 45 days.
EVEN IN A RECESSION THESE BUSINESS’S ARE NOT GOING UNDER (THEY HAVE BEEN THROUGH 2007-2009 AND SURVIVED)
EQUITIES (RESULTS BELOW) NO PLACE TO HIDE IN 2018
*request more info in interested
ALTERNATIVE ASSET CLASSES (annual returns will be in the 4% to 8% range)
Included in this category are:
Trez Capital (lending)
Nationwide Storage & Car Wash (real estate)
Avenue Living (apartments)
Centurion Apartments (apartments)
All of these have investments have had zero negative volatility and have paid out the distributions as suggested.
I have been ENCOURAGING (some say arm twisting) clients to participate as much as possible in this asset class (there are participation rules and maximums for most clients)
THERE IS STILL TIME TO RE-POSITION PORTFOLIOS TO INCLUDE (or increase) THESE ALTERNATIVE ASSETS…now is a great time to meet and discuss!
Client portfolios are put together with a few underlying principals but the most important one is:
‘to achieve a target rate of return with the LEAST amount of volatility’
I will do my utmost to protect you from a PERMANENT loss of capital BUT I cannot protect you from volatility AND generate returns over that of a 5 year GIC.
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professional before making an investment decision
‘historical analysis does not reflect future returns’