Investing for tough times ahead

Guarding Wealth: When you have to change your strategy from “making money” to “not losing money”

We are coming to the end of the longest bond bull market in history, a 32-year trend of falling interest rates and rising bond returns. Marked by a final decade of global stagnation and, recently, inflation rates virtually at the doorstep of deflation, the next step is expected to be a small rise in short term interest rates.

The U.S. Federal Reserve Board, virtually the most important central bank in the world, is expected to raise rates 25 basis points, which is one-quarter of one per cent, on December 16. Big deal? Yes, for the rate before December 15 was zero to 0.25 per cent. So that’s a doubling at least. Does anybody care about paying one-quarter of one per cent? No, probably only a few wingy speculators, but the trend is clear. Building projects hanging on low loan rates, industrial loans supported by thin profit margins… the list of victims is apparent.

For Canada, the outlook is grim. The former prime minister, Mr. Harper, said that only one sector of our economy, energy, is weak. Yet he left out auto parts manufacturing, which will be harmed by the Trans Pacific duty reductions that Canada has accepted, allowing in more cheap Asian parts, all to the distress of Ontario.

What to do? Farmers and, for that matter, everybody else, needs to move from a strategy of how to make money to how not to lose it. Speculative investing, for example, hitching a ride on high flying pharmaceutical maker Valeant Pharmaceuticals International Inc., which tumbled from $348 in early August, 2015 to $116 recently, is out. Dividend investing in banks and utilities is in. Paying high fees to advisors who cannot squeeze performance out of stocks in a stagnant market without taking unacceptable risks that they usually do not disclose to clients, is out.

It’s a lot like farming

Investing is not so different from managing a farm. You would not overpay for a combine, so why overpay for a stock? For example, your time horizon can dictate a stock price. You can get bank stocks priced so that next year’s earnings per share, the p/e ratio, are 12 times today’s price. That means you have to wait for a dozen years before today’s earnings pay back the share price. Of course, share prices grow and our big banks have dependable and rising dividends around four per cent. You can buy a phone company like BCE Inc. with a p/e of 18 and a dividend of 4.6 per cent. A solid utility like Fortis Inc. has a p/e of 14.6 and a four per cent dividend. You are unlike to go broke with any of these “foundation” stocks.

Do you need to pay an advisor to buy these stocks? Yes and no. If an advisor rings up a big annual gain for you in good years and bad and has done so for a decade, he or she is probably worth the fees. But average advisors sell average mutual funds and pretty average stocks.

A few decades ago, I used advisors at big banks. I bought their mutual funds, paid extra fees for advice, and found that the com- bination of fees, which added up to three to five per cent — including trading charges, advisory charges for discretionary management accounts likes, and custodial charges — left my assets stagnant. When markets rose, my portfolios were flat, when markets fell, I lost what the market did and then several per cent more.

I stopped thinking that I should leave any money with advisors. My own portfolios, the ones I ran with no advice from anybody, were beating the institutional managers. I took back my money, doubled it and more over 15 years with opportune purchases of banks and utilities, a railroad, a few consumer staples and some provincial bonds. I still have some low fee mutual funds that have done fairly well — at least they have not lost money, but none of the funds have fees high enough to interfere with the power of compound interest. The single principle is to get some income out of your portfolios — at least a couple of per cent after all fees. A growth of two to four per cent by dividends and two to four per cent on price gives you a four to eight per cent range of return. You won’t get suddenly rich, but you also won’t get poor.

One thing to do is to read. There is endless data online. The Financial Post, for which I also write, is available online every day for nothing. Other national papers can be found online as well, along with the British Financial Times, The Wall St. Journal and many more. Reading up on where your money may go or where, if invested, is headed, is just sensible. You can be informed and, from time to time, horrified at the conduct of companies (think of Nortel or Enron) or pleased that your own investments are doing fine.

About the author

Columnist

Andrew Allentuck is the author of 'When Can I Retire? Planning Your Financial Future After Work' (Penguin, 2011).

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