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When to Invest in the Market?

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One of the most frequent questions posed by clients concerns whether now is a good time to invest in the equity markets.   As the last two months reminded us, even during a bull market, pull backs are quite common.  In fact, on average, the stock market experiences a 10% or greater decline almost once per year and smaller declines of 5% or more 2-3 times per year.  No one wants to put new money into their portfolio only to see it go down in the short-term, but generally the bigger risk is having money sit on the sidelines uninvested.  While equity markets can experience large declines (2008-2009 is the most recent example), historically, they have earned over 9% per annum, while cash has only earned roughly 3.5% [1].

14498871_sTherefore, when we are asked the question whether now is a good time to be invested in equities, we typically respond YES it is (although the percentage allocation will vary by each client and their circumstances).   A recent report from Charles Schwab’s Center for Financial Research titled “Does Market Timing Work” confirms this view. [2]  The author, Mark Riepe, examined the returns for five different types of investors (listed below) who each received $2,000 at the beginning of every year over a 20 year period ending in 2012.  The individuals were:

Peter Perfect, who had great market timing ability and managed to invest the $2,000 each year at the S&P500’s lowest monthly closing value.

Ashley Action, who invested her full $2,000 each year at the earliest possible moment.

Matthew Monthly, who divided the $2,000 into equal monthly allotments.

Rosie Rotten, who had the opposite luck of Peter Perfect; she invested her funds each year at the monthly market peak value.

Larry Linger, who could not determine when to invest in the market, so he chose to keep his funds in cash (using Treasury bills as a proxy) every year.

Fast forward to the end of the 20 year period and the results may be somewhat surprising.  While equity markets were substantially higher at the end of 2012 from 1992, this period did include two bear markets (2000-2002 and 2008-2009) and many corrections of 10% or more.  Even Rosie Rotten who had horrible market timing, investing at each year’s monthly peak, still managed to earn a strong return.

Peter Perfect had the highest closing value, turning his $40,000 of investments ($2,000/yr. over 20 years) to $87,004.  Ashley Action earned the next most at $81,650.  Matthew Monthly fared well with $79,510.  Even Rosie Rotten still ended up with $72,487, a gain of over 80% on her capital.  The only real loser was Larry Linger who saw his $40,000 only grow to $51,291.

The more important point of the article is that these results were consistent across nearly all time periods analyzed.   The author analyzed 68 rolling 20 year periods beginning in 1926 (prior to the Great Depression) and in over 85% (58 out of 68) of those periods, the results were the exact same (Peter performed best, followed by Ashley, Matthew, Rosie and Larry was last). 

Of the 10 periods that did not follow this normal pattern,  Ashley Action never finished in the bottom. Instead she still finished second 4 times, 3rd 5 times and 4th once.  In fact, Ashley Action who invested her funds immediately, had the second best return of the pack 91% of the time and was third or better in 98.5% of all rolling 20 year periods.  Larry Linger, by contrast only finished in first or second twice, in the periods 1955–1974 and  1962-1981.  He earned the lowest return in 91% of all time frames.

Equities have historically provided the highest returns among traditional asset classes, but with significantly more volatility.  While, investment advisors and counsellors can never guarantee results, nor can they always determine the best time to invest in the market, but at TriDelta Investment Counsel, we suggest that all long-term investors have an allocation to equities in their portfolios.  As the report suggests, we prefer the odds of Ashley Action and Matthew Monthly achieving their financial and retirement goals much better than those of Larry Linger.



[1] http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html.  Returns on S&P500 from 1928-2013 had a geometric average return of 9.55%.  3-month T-bill average return was 3.55%

[2] For a copy of the report by Schwab Center for Financial Research, please go to: http://perspective.schwab.com/mobile/article/7510/Does-Market-Timing-Work.

 

Lorne Zeiler
Written By:
Lorne Zeiler, MBA, CFA
VP, Portfolio Manager and Wealth Advisor
Lorne can be reached by email at lorne@tridelta.ca or by phone at
416-733-3292 x225

Market Turmoil – Why your portfolio is not as bad as the market

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Over the past 6 weeks, but especially in the past week, the stock markets have experienced a meaningful pullback.

From its peak to close yesterday, the TSX was down 11.5%.

The US S&P500 was down 7.9% from its peak.

Dow Jones Germany was down 14.8% from its peak.

Our clients have typically fared much better during this period for the following reasons:

  1. The Canadian Bond Universe is up 0.7% since September 1. This is one of the main reasons to own bonds – in most cases they act as a counterbalance to stocks during weakness in the stock market. In addition, it isn’t just owning bonds, but also making the right choices in terms of corporate bonds vs. government bonds, and owning long term bonds vs. short term that can further benefit a portfolio. Fortunately, at TriDelta we have been predicting lower long term bond yields, and have benefitted from owning longer term bonds.
  2. TriDelta looks at volatility risks and builds stock portfolios that are meaningfully less volatile for our more conservative clients, but even for our growth clients, there is an element of capital preservation in our stock selection. As a result, while our stock portfolios have declined in value, we have meaningfully outperformed the TSX index over this rough period. Conservative clients would have outperformed the TSX by 8% on the stock part of their portfolio since the beginning of September (decline of only 3.5%). Growth clients would have outperformed the TSX by 3% on the stock part of their portfolio.
  3. All this means that your asset allocation and risk profile have an important impact on performance when things are going well, and when things are not going so well. For example, a conservative TriDelta client with only 40% in stocks would be down roughly 1% since September 1st. A growth TriDelta client who is 80% in stocks will be down roughly 7% since the peak of the market. In addition, our High Income Balanced Fund is down just 1.5% since September 1. While we never want to be down, this should give you a better sense of how your portfolio has fared within the pullback.

13797194_mA final note on asset mix. We believe that if your asset mix was right for you 6 months ago, it is probably still correct for you today. The only reason for a meaningful change is if your cash flow needs have changed significantly or if your overall financial position has had a meaningful change. If those haven’t happened, we wouldn’t recommend changing now. Keep in mind that in February 2009 it was almost impossible to get people to invest in the market – with most late RRSP contributions going to cash. For the full year 2009, the TSX had a return of 35.1%. The point is that it is very difficult to pick a market bottom, but we do believe it isn’t far off from here. When the bottom hits after a sudden pullback, there is quite often a very strong rally. Investors with a long term perspective do not want to miss that rally.

We will continue to monitor various factors closely, and may make some changes to portfolios as we do throughout the year, but for now, we believe it is not the time for major changes.

One factor we are monitoring is Ebola. We do not know what Ebola will become on a global basis. We do know that over the past 90 years, the fear factor on ‘new’ diseases and viruses has been much greater than the actual global impact. How many of us even remember the Swine Flu? In June of 2009, the World Health Organization and the US Centers for Disease Control announced that it was a Pandemic – and fears were rampant. While not equating the two, we believe that it is very likely that today’s fear will prove to be overdone on a global basis.

As always, we are happy to talk to and meet with all clients at any time. If you have questions or concerns, please do not hesitate to contact your Wealth Advisor.

Thank you.

TriDelta Investment Management Committee

Cameron Winser

VP, Equities

Edward Jong

VP, Fixed Income

Ted Rechtshaffen

President and CEO

Anton Tucker

Executive VP

Lorne Zeiler

VP, Wealth Advisor

TriDelta Q3 2014 Investment Report – Keeping the faith when the news is bad

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Executive Summary

5186232_s1Last quarter, our message was that Q3 is historically a positive quarter, but not as strong as Q1 and Q4. The message was also that we should expect to see our recent string of 1%+ monthly returns come to an end. Well it took until September, but it did indeed come to an end.

As the bad news from around the world seems to keep coming in, and people’s fears for the market escalate, TriDelta remains fairly confident in North American stock markets as we head into the fourth quarter. This isn’t because we are ‘fiddling while Rome is burning’. It is because:

  • corporate earnings remain strong
  • interest rates remain low (more on that further in our commentary)
  • the US economy is growing
  • you can buy BCE stock and get a 5.1% dividend that will grow every year or you can get a 5 year GIC at 2.5% that will not grow (and will get taxed more in a taxable account).

We recognize some of the challenges in the market and world, and are watching them closely but a big part of our job is to try to separate the meaningful information from the short term noise. For now, we believe that the meaningful information is telling us that stocks remain a better investment option than bonds or cash.

Two other notes on the month and quarter ahead. Only once in the past decade has a negative September been followed by a negative October on the Canadian and US stock markets. Of course, we all remember 2008 (sorry for reminding you).

As a final point, the broad US based S&P 500 has had a great run since March of 2009. However, within that run, the market has dropped 5%+ 11 different times, and each time has rebounded quite quickly and advanced further. As of this writing, for all of the noise, the S&P 500 still isn’t down 5% from its peak for a 12th time. While the TSX and other areas of the world were down more, the point is that these pullbacks are very normal, and we believe this is one more of them.

The Quarter that Was

The quick summary is decent numbers for bonds, a little weak for stocks, very weak for emerging markets, metals and mining and smaller cap stocks.

After a drop of 4.3% on the TSX in September, Toronto stocks ended the quarter down 1.2%.

The DEX Bond Universe saw a loss of 0.6% in September, and a quarterly gain of 1.1%.

Preferred shares saw small quarterly gains in the 0.5% range.

Both the S&P500 (US) and the MSCI World Stock Index had losses in September, and had similar quarterly returns with small gains of 0.6% and 0.4% respectively.

Currencies played a role in the quarter with the US dollar appreciating strongly against most world currencies and also to the Canadian dollar. Greater exposure to US dollar investments helped Canadian investor returns on the month. For example, while the S&P 500 was down 1.4% last month in US dollars, it was in fact up 1.6% on a Canadian dollar basis – for a 3% swing on currency.

How did TriDelta Clients Do?

Fortunately, most TriDelta Financial clients had a decent quarter.

Conservative clients did very well – with most up 1.5% to 2.5% on the quarter.

Growth clients were a little weaker – most were flat to slightly down on the quarter.

The reason that conservative clients did better was two-fold. Bonds and preferred shares outperformed most sectors of the stock market for the quarter, but within the stock market, large cap, dividend payers (outside of metals and mining) had solid returns, and these are the types of stocks that TriDelta owns in our Pension style portfolios. Of course, owning Tim Horton’s in Pension portfolios also helped.

Even in September, as the TSX was down over 4%, most of our Conservative clients (who are up between 8% and 10% on the year to date), kept September returns to a loss of less than 1%.

Over the long run Growth clients should outperform, but so far in 2014, our Conservative clients have seen better returns.

 

TriDelta High Income Balanced Fund

Some clients who are accredited investors ($1 million+ in investment assets or $300,000+ in household income or $200,000+ in personal income), have been able to invest in the TriDelta High Income Balanced Fund. This pooled fund aims to deliver high yields, and broad diversification, through stocks, options, and low cost leverage of bonds. Year to date the fund has returned just under 10%, and has been in the top decile (top 10%) of all balanced income funds in Canada. In Q3, the fund was up 0.7%. We are very pleased with the performance of the fund so far this year.

Pending legislation changes may mean that the Fund could be available to all non-accredited investors soon. We will keep you posted as soon as this change comes into reality.

Positive Dividend Changes Continue

We continue to pay close attention to dividend growing stocks. We believe that this is a strong part of long term, lower volatile investment success. Again this quarter we are pleased to say that there were no dividend declines, and the list of seven dividend growers are as follows:

Company Name % Dividend Increase Company Name % Dividend Increase
Home Capital +12.5% Emera +6.9%
Conocophillips +5.8% Royal Bank +5.6%
McDonalds +4.9% Verizon +3.8%
Bank of Nova Scotia +3.1%

The Quarter Ahead

10884799_sWe believe that interest rates are one of the biggest drivers of the market today, and the better handle we have on future interest rates, the better we will manage your overall portfolio. In summary, we believe that short term rates will rise in the US in late 2015, but only by a small amount. We believe that short term rates in Canada likely will track those of the U.S. – perhaps with some lag. We believe that long term rates in the US and Canada will remain fairly volatile, but could in fact move lower.

The basic message being that meaningful interest rate rises are unlikely to take place and that this helps guide our investments in two ways.

The first is that this will help the stock market as growth is encouraged by low borrowing costs.

The second is that long term bonds are a reasonable investment as well, and are not to be feared.

Here are 6 items driving our view of interest rates:

  1. “Everyone” thinks interest rates are going higher, but the market seems to be telling us something different. This can most easily be seen in the 10 year bonds in virtually all Western countries that have seen meaningful declines in 2014 – most notably in Europe.
  2. Yes it is true that Quantitative Easing will end by the end of this year, but US long term interest rates have actually fallen during most of the months that the US government has been reducing its bond buying. The noise about the end of Quantitative Easing has upset the market, but the reality is that long term interest rates may come down further from here. Don’t get caught up in the noise.
  3. Short term rates in the US are going to rise in 2015 – but it will likely be so small that it won’t make much of a difference? Fed Funds Futures currently give a 75% chance that the first US rate hike will be around September 2015 (still almost a full year away). There is a 50% chance of a second hike of 25 basis points (0.25%) by the end of 2015. IF both happened it would move the US Fed Funds rate from 0.25% all the way to 0.75%. This would mean that in 12 to 15 months, the US Fed Funds rate will still likely be at close to historical lows.
  4. Geopolitical risks (Russia, ISIS and Hong Kong) are providing a safe haven trade into bonds – especially in the US and Canada. This flood of funds into bonds is keeping interest rates low.
  5. As the largest debtor nation in the world, the United States doesn’t want to have to pay more on their own debt. Just like you want your mortgage rate to be low, imagine how much a country with $18 trillion of debt would like to have low interest costs!
  6. Household debt levels are significantly greater now than before the financial crisis. If the US Fed hikes rates prematurely, there is a risk of a recession.

Summary

While you don’t want to sift investment decisions down to a couple of numbers, we do feel that today, interest rates play a bigger predictor of future stock market returns than they have in a long time.

Fortunately for us, our view is that long term rates in particular, will be supportive of higher equity markets, particularly in the U.S., for the period ahead. Corporate earnings remain very important and have been largely positive of late, but we believe that low interest rates will also be key to continued earnings growth.

As an aside, investment markets tend to perform better from October to March than the 6 months that have just past. Let’s hope that trend continues.

May we all enjoy the beautiful fall colours that Canada provides, and remember to take time to be thankful for the good in our lives.

 

TriDelta Investment Management Committee

 

Cameron Winser

VP, Equities

Edward Jong

VP, Fixed Income

Ted Rechtshaffen

President and CEO

Anton Tucker

Executive VP

Lorne Zeiler

VP, Wealth Advisor

 

 

The newly rich: How your world changes when downsizing creates a windfall

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ted_banner

You may never have imagined yourself sitting on a financial windfall and wondering what to do with it but many older Canadians who have lived through the housing market’s finest hours are facing just that.

If the investment in your family home has paid off handsomely over your lifetime, there might come a time to lock in those gains. You could downsize and buy a cheaper home or condo — if you knew how long you might want to live in the property and if you don’t mind all the land transfer taxes and transaction costs.

9589919_sOr you could give yourself the flexibility of renting an equally nice home or condo.

The question is – what do you do with it, and what do you need to think about, when that big cheque comes from the real estate lawyer?

Here are five things to think about:

  • What is your new annual budget going to look like? You will have major savings on annual house upkeep and repairs and no more realty taxes. You will have major new expenses with your monthly rent. Will this end up costing you $40,000 more a year or only $10,000 more or is it closer to a break even scenario?
  • In order to cover off annual spending, how much, if any, do you need to draw each year from your non-registered investments? The key is not to think about how much income does this need to spin off, but rather cash flow. This income focus is a mistake that many people make, and it sometimes leads to higher risk investments and almost always in much higher taxes.
  • Based on your current situation, what is the chance of you outliving your money? What is your likely estate value and lifetime tax bill? These important questions may require help from a financial planner, but if you don’t already have a strong handle on this, now is the time to get it. Aside from peace of mind, having this knowledge will drive a number of decisions around your spending habits, investment strategy, gifting habits (to family or charity), tax planning and estate planning.
  • Your tax bill is getting very big, and you need to figure out how to make it smaller. In addition to being forced to draw 7.59% of your RRIF value (based on age 73), you are now suddenly taxed on income and realized capital gains on investments. If you earn 5% income (half Canadian dividends and half interest or U.S. dividends) on this portfolio, that works out to $35,000 of Canadian dividends and $35,000 of fully taxed interest and U.S. dividends. You could be facing over $20,000 in taxes that you weren’t facing before plus you could lose $6,700 in annual Old Age Security (OAS) payments. This is a little less painful if you are able to fully split income with your spouse, but can be very expensive if you are single.

 

The good news on the investment front is that you can structure the portfolio to generate much less income, cut  your tax bill, and possibly even keep your full Old Age Security payment in the process. Among the tools to help accomplish this would be:

  • Start with an investment portfolio that has limited exposure to interest income and U.S. dividend income in the taxable investment account. This will lower the amount of income that faces the highest tax rate.
  • If you are paying for investment advice, try and ensure that the investment fees are tax deductible. This will lower your overall cost and also lower your taxable income and can help with OAS recovery.
  • Consider Corporate Class funds that have low yields and can defer capital gains – or other income limiting investments.
  • Look at other tax sheltering ideas such as shifting some funds to tax sheltered insurance or using flow through shares with investment certainty (a locked-in loss) that is more than offset by government tax credits.
  • Look at gifting strategies as part of the overall plan – both giving to family and to charity.
  • How do you use your wealth to make the most of your remaining years? This is touched upon above, but it is really about sitting down and saying ‘what do I want to do now? What goals do I have for myself?’ Not just the bucket list idea, but what kind of values and relationships do I want to leave with my kids and grandkids and friends? Do I want to try to make a bigger difference in other people’s lives – either financially or through other things that I can do? When you suddenly have more liquid wealth at your disposal, it is a good time to take a step back and think about what it can allow you to do?

 

While the selling of your family home can trigger this type of review, it can happen in other situations as well. Often it is at a time of inheritance or in some cases when a retiree chooses to take the value of their pension as a lump sum. It can even be the much rarer scenario of a lottery win.

At all of these times of positive financial change, it is important to think about how it could change your lifestyle, how your tax situation changes, what type of advice you might require, and how it might allow you to positively impact others. These situations may never come up in your life, but if it does, it is often a once in a lifetime opportunity. Plan wisely.

Ted can be reached at tedr@tridelta.ca or by phone at 416-733-3292 x221 or 1-888-816-8927 x221

Reproduced from the National Post newspaper article 1st October 2014.

Why older seniors should rent instead of buy

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ted_banner

After 18 years of ups in many Canadian markets, you always should wear armour before telling someone to rent instead of buy. With armour firmly in place, I believe that there are times when this definitely makes more sense.

Don’t get me wrong. I believe that your principal residence is usually a great investment, and one with the obvious advantage of being an investment you can actually live in as opposed to just being a line on a statement. The biggest problem with buying a home is that the transaction itself can be very costly and depending on where you live, it can be very difficult to sell in a timely manner if you need to.

If we take a 76-year old-couple who are considering selling their current home and downsizing — one of the basic questions is are you looking to buy something new or rent?

Some people fear renting because they may be forced to move from a property. While this can be a legitimate concern, it largely depends on who you are renting from. If you are renting from an individual for whom this is their only rental or they are planning to take over the space personally at some point, then it is a real risk. If, however, you are renting from a professional property manager with a long track record, then the risk becomes very small.

In addition to this, “the Residential Tenancies Act is actually extremely helpful with respect to protecting the tenure of a tenant” says Michael Baum, a real estate lawyer in Toronto with the firm Harris, Sheaffer LLP. He goes on to say “landlords have very limited rights of termination even on expiry of term. This makes it very favourable for such a renter.”

For those who have been home owners for the past 50 years, it is sometimes an odd concept to consider renting. It is almost a point of pride. “I am a home owner, not a renter.” I understand that sentiment, and if it is important to someone then that should clearly factor in the decision.

But before letting pride be the driver of the decision, let’s look at a few facts:

  • Prices can indeed fall and take years to recover. In 1989, the average sale price of a Toronto home was $273,698. In 1996 it had fallen over 27% to $198,150. It took 13 years for the 1989 sale price to be reached again. In Vancouver, a detached home cost $180,000 in 1981 and dropped 39% in just over a year to $110,000. It took 7 years for prices to recover to their 1981 level.
  • You can easily lose $40,000 in land transfer tax, and other ‘special fees.’ This depends greatly on where you live. In some places, this isn’t an issue. If someone in Toronto wants to buy a $1-million condo, they will pay $32,200 in land transfer taxes. In addition, especially with condos, there can be a variety of gas and electricity hook-up fees, development fees, deposit verification fees, that add up to several thousand dollars.
  • What happens when you eventually sell the condo? The biggest thing is that you are faced with another set of real estate commissions for selling the condo that wouldn’t have existed if you rented. If you are paying 5%, then you would have $50,000 in selling fees on top of the money you might spend to prepare the condo for sale.
  • What if you need to move for health reasons? This is a big concern. If someone’s health declines, sometimes there is a need to move fairly quickly. This doesn’t necessarily mean that a condo or house must be sold immediately, unless the sale is needed to free up cash flow. While in some markets, a sale can happen in a matter of days for a good price, in other markets it could take months, and if there is some pressure to get it sold, the selling price will likely take a hit – costing even more.

Based on the issues above, my sense is that you should really plan on living somewhere for at least six years if you are planning to buy a property. That will at least give some time to amortize the big costs of buying and selling. If you think there is a decent chance of being in a property for less than six years, then financially you are betting on strong real estate growth for it to make financial sense. While that is certainly possible, it is a financial bet that may not pay off.

There is no clear right or wrong answer on the buy versus rent discussion, but for those with greater uncertainty over the next five to 10 years, you may want to consider renting for financial reasons as well as greater overall flexibility.

Ted can be reached at tedr@tridelta.ca or by phone at 416-733-3292 x221 or 1-888-816-8927 x221

Reproduced from the National Post newspaper article 30th September 2014.

Why We Own Stocks

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With the equity market sell-off at the beginning of August, investors have been reminded once again that there is risk to investing in the stock market, but before hitting the panic button, it is worthwhile to review why we suggest allocating at least part of your portfolio to equities and why stocks are still likely to offer the best total return over the medium to long-term.

While some people have called the stock market a casino or worse, investors need to be reminded that each share of stock represents a fractional ownership of a business. When you buy shares of Apple, Pfizer, BCE or TD Bank, you are becoming a fractional owner in those enterprises. The value of that business is based on the future earnings and cash flow that those companies generate. Buying shares of good companies at a reasonable price has been and likely will continue to be one of the best methods of building long-term wealth.

The main reason that people have bought equities is to generate higher returns in their portfolio. This is called the Equity Risk Premium (ERP). The ERP represents the additional return that investors have earned owning equities over other asset classes. Historically, equities have provided a 4% higher return than bonds1 per year. If the investment is in a taxable account, that premium is even higher as equities generate capital gains and dividends, both of which are taxed at much lower rates than bonds (interest income). Please note though that the 4% premium is an average, meaning in some years the benefit will be much greater than 4% and in other years equities may earn a lower return than bonds or a negative return.

Inflation Hedge: While bonds offer security – a fixed coupon payment from issue to maturity date as long is there isn’t a default, investors bear inflation risk. This is the risk that if inflation increases, the fixed coupon payments from the bonds will have a lesser value, because these cash flows will not be able to buy the same amount of goods and services, i.e. have less purchasing power.

1727060_sSince equities are public companies, typically when inflation rises, these companies find ways to continue generating higher profits by raising prices and /or cutting costs. E.g. if inflation rises, Walmart, McDonald’s, Royal Bank and TransCanada Pipelines typically find ways to continue increasing profits (and potentially dividend payments to shareholders) through changes in pricing or cost cutting measures, thereby protecting the investor’s purchasing power.

Participate in Economic Growth: While economies do experience contractions from time to time, typically Gross Domestic Product (GDP) increases over time. As the economy expands, so should earnings of quality public companies (equities). Historically, these companies will generate more in sales and be able to increase prices during periods of economic expansion, and be able to reduce costs during periods of economic weakness, which should lead to higher earnings per share (EPS). Higher EPS typically leads to higher stock prices and often to higher dividend payments over time. In short time periods, particularly recessions, equity prices may decline even if earnings rise, but on a long-term basis, equities have been one of the best ways for investors to benefit from economic growth.

Low Interest Rates: While interest rates are expected to rise in the first half of 2015, we expect the increases to be small initially and the pace of the increases to be slow. Low interest rates benefit equities in a few ways: 1) relative attractiveness – institutions and individuals need to put their investment dollars somewhere. When interest rates are low, the relative attractiveness of stocks, particularly those that pay a dividend, is greater, i.e. when your choices are investing in a GIC paying less than 2%, and a government bond paying less than 2.5%, investing in stock that pays a 3% dividend and offers the potential for capital gains is quite appealing. 2) enhanced earnings – with low interest rates, companies need to devote less of their revenues to debt payments, which enhances profit margins and overall earnings. Higher earnings typically leads to higher stock prices. 3) Share buyback – many companies are using their savings on debt costs to buy back their shares on the market. If the number of shares outstanding decreases and earnings remains relatively the same, earnings per share (EPS) improves as well. From Q2 2013 to Q2 2014, U.S. companies bought back approximately 3.3% of their shares outstanding2; these share repurchases increased earnings per share.

While we do not expect equity returns similar to 2013 or 2014 in the year ahead, we still expect equities to outperform other asset classes in 2015. Because of their many benefits, equities should remain a key part of each investor’s portfolio over the long-run.

The overall percentage of equities to own in an investment portfolio, and the type of equities to hold (large capitalization vs. small capitalization, developed market vs. emerging market) are best determined by meeting with a trusted investment counsellor and /or financial planner. A trusted planner reviews their clients’ income and cash flow needs as well as taxes to determine the clients’ needed rate of return. An investment counsellor analyzes investments to determine the best return prospects relative to each investor’s willingness and ability to take risk in his investment / retirement portfolios.

 

[1] http://www.seeitmarket.com/quantifying-equity-risk-premium-13202/. Quantifying Equity Risk Premium, Allan Millar, January 30, 2013. Based on S&P500 Index return vs. U.S. Government and Corporate Bond Indices. Data set from Ibbotson 1926-2010.

[2] http://www.factset.com/websitefiles/PDFs/buyback/buyback_6.18.14. FactSet Quarterly Buyback S&P500, June 18, 2014.

 

Lorne Zeiler
Written By:
Lorne Zeiler, MBA, CFA
VP, Portfolio Manager and Wealth Advisor
Lorne can be reached by email at lorne@tridelta.ca or by phone at
416-733-3292 x225
Cameron Winser
Written By:
Cameron Winser, CFA
VP, Equities
Cameron can be reached by email at cameron@tridelta.ca or by phone at
416-733-3292 x228
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