Portfolio Options for a Risky Market
If I had a formula for bypassing trouble, I would not pass it round. Trouble creates a capacity to handle it. I don’t embrace trouble; that’s as bad as treating it as an enemy. But I do say meet it as a friend, for you’ll see a lot of it and had better be on speaking terms with it.
~Oliver Wendell Holmes
When I wrote about Why This Is No Market for Couch Potatoes, it sounded like I was saying that there’s elevated risk in both the stock and bond markets at this moment in history. I was. That begs the question then: Where can we invest? If not stocks or bonds, where? Gold? Real estate?
An astute reader posed that exact question and I said I would address it in a future article. So here we go. I presume that all of you already realize that I don’t have any more idea what will happen next in the market than anyone else. The following ideas do not represent investment advice in any way, shape or form. This article is just me thinking out loud, sharing it with you, and hoping you’ll think out loud right back.
Gold has been a bit of a nemesis for me for quite a few years. It’s kind of a microcosm of all of the investing mistakes I’ve made over the past decade. First, I read and understood the rationale for all of the gold bug arguments:
- The global debt bubble will force governments to print money in one way or another.
- Global currencies are now fiat money and don’t represent a real store of value. Gold does.
- The serial financial crises caused by the debt bubble will cause a loss of confidence in fiat money and a flight to hard assets like gold.
- Whether we get inflation, deflation or both, capital will run to gold for shelter.
After I read about all of this, I can remember talking it over with a few people and observing that gold might be the buy of the decade. It was trading around $300 at the time. Wow. Was I ever right. The problem is, I never did buy gold. I really believed that we would see a series of financial crises, but I felt like gold might get dragged down with all of the other asset classes if that happened.
Actually, gold did fall for a while during the worst of the 2008 crisis. But I think we all know that it’s considerably above $300 now, having just breached the $1600 mark. I didn’t profit from that run-up at all.
So what can we learn from all of this besides the fact that you might want to take my ideas on gold with a grain of salt? There’s a decent case for it to hit $2000 or much higher if global authorities keep kicking the can down the road. But I can also see why some are uncomfortable investing in a metal that has no real industrial purpose other than the bull market in bling.
If you buy the gold bugs’ argument, you can try to buy gold on dips. Just make sure you have an exit plan. At what point will you take profits? When will you cut losses? If you’re one of the skeptics, put your money elsewhere. There are lots of other options.
How About Real Estate?
Again, it depends on where you live and how you want to invest. If you live in the U.S., property prices have already fallen a lot. That doesn’t mean they can’t fall more, but it seems like prices in the States are getting closer to attractive valuations than those here in Canada, especially with respect to Vancouver and Toronto – location, location, location!
When you’re talking about buying real estate, there’s a big difference between buying a property for investment purposes and buying a personal residence. I don’t necessarily look at our home as an investment, although I wouldn’t want to see the value of the home we just bought fall by a great deal – just in case we need to move again. (Yikes, I hope that doesn’t happen. I’m already sick of packing and we’ve only just begun!)
You can invest in real estate via rental properties, but then you either have to pay a property manager or handle those duties yourself. Some people (myself included) just don’t want the headaches. An alternative might be to look at buying some REITs (Real Estate Investment Trusts). You can buy them individually or through an ETF like the iShares XRE product. It offers a decent yield and it now pays monthly. U.S. investors have even more choice when it comes to real estate ETFs. Again, you can control your risk by controlling your position size.
What If Nothing on the Menu Looks Good?
Given that I’ve also written about the unattractive qualities of bonds, it seems as though nothing on the investment menu jumps out as extremely appetizing. If you feel the same, you have a few choices:
- Skip the restaurant and eat at home. Translation: go to 100% cash and invest in savings accounts and GICs, accepting the boring cuisine as the price of safety.
- Order a combo platter. Translation: choose a few investments that appeal to you and just buy less of them than you normally would.
Suppose you’re worried about the global debt situation and the explosive derivatives that are wired to all of that debt. But maybe you’ve been worried for quite some time and noticed that the market has still risen by over 90% over the past 2 years. You’re not sure how long that can continue, but wouldn’t mind achieving a little more than the 3% or so that 5-year GICs are offering. What do you do?
Again, I can’t tell you what’s best for you, but here are a few ETF options for Canadian investors:
XTR: This ETF is sort of like investing in a balanced mutual fund with about 55% stocks and 45% bonds. It yields around 6% and carries a management fee of 0.55%. Basically, it holds a lot of other ETFs. If you’re looking for a one-stop option, you’re new to investing, or you have only a small amount to invest, this is worth a look.
XUT: This is the new iShares utility ETF. Utilities are usually less volatile, especially in tough economic times and they typically pay a decent distribution.
XEI: This all-stock ETF invests in individual companies rather than ETFs. It pays a monthly distribution and offers exposure to 75 of Canada’s dividend paying companies.
HIX: This is the single inverse ETF for the TSX – no leverage here. It goes up each day by the same percentage the TSX goes down. You can use it as a hedge against one of those mornings where you wake up to red screens across the globe, or just as a way to insure against that debt bomb blowing up your portfolio. (Disclosure: I own a very small bit of this that I trade around occasionally.)
XCB: Another reader said he was shifting out of XIU (TSX 60 equities) into XCB (corporate bonds). This is another option. You can collect the distributions from the bonds of large, stable corporations without incurring the presumably higher risks of owning their stocks.
I wrote in more detail about these three ETFs recently, so you can check out those articles for more detail: 3 New ETFs for Canadians and Income Investing for Canadians. Obviously, your investment options don’t end there. I just wanted to point out that you can still own equities and/or bonds if you want to, that there are ways to generate decent income from some of them, and that you can limit your risk by lowering your exposure. It seems George Soros is taking the same approach with some of his funds, having gone to 75% cash in at least one of them and later announcing that he was exiting the hedge fund business altogether.
Although investing may not be as easy as flopping on the couch with a bag of Cheetos, keeping it simple is always a good idea. There are lots of choices on the menu. You can choose only the ones that suit you, or nothing at all.
Do you have any good strategies for reducing risk?