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5) Where and how are you personally investing at the moment?
My personal investments are invested in keeping with a long-term strategy that I developed for myself. It outlines my allocation between fixed income and equities as well as my allocation between Canada and the rest of the world. The only trades I make are to rebalance the portfolio when it deviates too much from these targets. Rebalancing ranges force me to sell high and buy low; this worked very well for me when I was selling bonds to buy equities in late 2008 and early 2009 even though it was very difficult at the time for most investors to even think about adding to their equity exposure by selling off bonds.
1) Is this a good time to invest?
Yes–there are some good opportunities available for the long-term investor at the moment. This is however a time when investors will want to be extra-diligent to select only the highest quality investments. It is also a time when having a disciplined (i.e. not based on emotions or hearsay) asset allocation and overall investment process in place is critical. While we are confident that we have seen the worst in this cycle, some of the risks that existed at the end of 2008 remain. So as the necessary structural changes happen in markets and economies around the world it makes sense to act cautiously and deliberately.
2) How do you think the market will perform in 2010?
I assume the question is referring to equity/stock markets. If one didn’t come away from the experience of the past year with the understanding that nobody can consistently predict the near-term direction of equity markets, they’ve missed the point. With that disclaimer in place, based on what is presently happening in economies around the world we expect to see markets as constructive in the coming year. Keep in mind however, that equity markets are for investors who can commit multiple years to holding what they buy. Whatever portion of your money you need during 2010 should not be invested in equity/stock markets.
3) What will be the strongest/weakest sectors?
Based on what we’re seeing in the global economy at present, it appears as though Global Growth will continue to create some demand for commodities. That said, investing sectorally with ones serious money is not a strategy we suggest. A more appropriate approach for most investors will be to diversify across all sectors geographic markets and asset classes for the core of a portfolio. If you have an interest in a particular sector and want to “play” it, consider doing so with only a very small part of your portfolio. A commonly discussed weighting to a sector focused investment is five percent or less.
4) What is the most important question I should ask before selecting an investment advisor?
If only it was as simple as asking the one “critical” question and you’d know you had the right advisor. Truth is, people need far more than advice on their investments. They need an advisor who will help them formulate plans based on their life goals, then design and implement financial strategies to help them meet those goals. Selecting investments is only one (and not the most important) part of what it takes to competently and comprehensively advise clients.
5) Where and how are you personally investing at the moment?
I practice what I preach. My own money is in diversified portfolios of very high quality investments, oriented to meet our life goals. I reserve less than five percent to “play” sector and other speculative investments.
Industrial alliance Securities does not have a firm economist or strategist, so these are not official views of our firm. I offer these insights solely to give you food for thought. They do not reflect our recommendations to clients as part of any investment strategy as we only focus on individual stock selection and use a bottom up approach. That said, here are some things I am reading that make sense.
Among the traditional asset classes, Equity appears to have the most embedded risk compared to fixed income and cash. The run up in North American equity markets has been so strong in Q3, perhaps driven more by demand by so much cash on the sidelines, than by fundamentals. Also, market psychology seems to have a bias towards optimism.
While the recession may be over, it is still hard to imagine a sustained economic expansion. Unemployment continues to rise and once stimulus runs out, we could face sideways range-bound markets for a time while the economy and financial system truly heals.
All that said, one cannot afford to be out of the market in case it moves up dramatically. Historically, major up moves happen in a short period of time and this is why a diversified portfolio is important. One should always maintain some equity exposure. However, it may be a time to reduce equity exposure, commensurate with individual investor’s risk tolerance.
Fixed income appears more fairly valued and therefore has less embedded risk. Though investors should be mindful of the risk of rising interest rates down the road. Corporate bond spreads have moved in dramatically, but may still offer some upside on bond values.
Geographically, Canada is an attractive place to invest due to the commodity exposure and healthy financial system. Within equity markets, commodities and financials (Canada) should be solid sectors. Certain industrials in construction and technology stocks should also be good.
I tend to favor companies with low leverage and solid cash generation capabilities in case more stress hits the financial system and high margins pad against need to offer price discounts and promotions to the distribution channel and guard against suppliers squeezing on the other side. Alternatively, investors can simply buy Exchange Traded Funds (ETFs) and gain easy diversification.