How to Invest Your Money » Portfolio

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.

On Gold

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?


  1. cashflowmantra

    Holding a little bit of gold is wise in any portfolio. It can help decrease volatility without affecting returns. Plus there is about 10% industrial production usage according to the US Geological Survey data. Not a lot, granted, but about 200 metric tons per year is something.

    • 2 Cents

      Whatever the reason, gold is working. It’s hitting a fresh record high this morning. Congrats on owning some! ๐Ÿ™‚

  2. Ian Brennan

    Nothing says we have to be fully invested all of the time. I use the charts to help me decide. Myself, I exited my last long position yesterday.

    • 2 Cents

      I agree. I’ve been trading around the HIX inverse ETF. Took some profits today, but hanging onto some in case this thing unravels further. At some point, I’ll buy into a couple of the ETFs I mentioned above in order to add some income to the portfolio. Managing risk is the name of the game.

      Thanks Ian! ๐Ÿ™‚

  3. I think you’re exceedingly brave for even taking up this topic! There probably has never been a time when the investment landscape looked more confusing. Economic fundamentals are floating somewhere between suspicious and disasterous, and yet every investment class is up–stocks, bonds, commodities, precious metals. If we get some serious economic news on the downside it’s not inconceivable that all markets could plunge simultaneously. Where do you go in that environment? That’s why I think you’re brave!

    As to gold and real estate, we’re in a “crisis moment”, and money is gravitating toward investments that are real. We can see this in the spiraling price of gold, though it isn’t apparent with real estate, at least not in the US. I suspect that sophisticated money IS going into US real estate, but they’re bottom fishing. That isn’t drawing much attention, and it hardly shows up in housing stats.

    No hard evidence here, but how much of the strength of the Vancouver and Toronto markets is being driven by American’s buying property there? I’ve heard this to be the case with the Chinese in Vancouver, but I wouldn’t rule out Americans either. Canada looks like a safer bet if the worst happens because it’s resource rich. And again, the smart money all know that.

    So gold, real estate and Canada are “real”, and that’s where money gravitates toward in times of crisis. Even though politicians, economists and statistics are shouting RECOVERY, I think there’s a sense on the street that something else is playing out. Just exactly what it is is the question, and that’s what makes this whole topic a dicey one.

    Personally, I’m not sure there is a safe haven investment at this point. Not even cash, with all of the global deficits. Our skills may be our best long term bet, so first and foremost we all need to keep getting better at what ever it is that we do.

    • 2 Cents

      I guess there’s a fine line between brave and stupid. ๐Ÿ˜‰

      I sometimes choose to tackle these topics because not a lot of others want to stick their necks out. But being wrong is part of investing. Learning how to deal with that is one of the best ways to become a better investor. Accepting uncertainty is essential. You can calculate “average returns” for any time period until the cows come home, but that doesn’t tell you anything about what the market will do over the course of your investment timeline.

      In essence, there really is no single safe haven as you said – even cash – especially if it’s denominated in U.S. dollars. Still, cash is safer than stocks or bonds and you can manage your risk by managing your exposure to each asset class.

      Thanks for contributing Kevin!

  4. My Own Advisor

    I guess my comment is, aren’t the markets always risky? Looking back, and forward, there is never really an ideal time for anything. That’s why I prefer to stay the course with a simple recipe of dividend-paying stocks, equity ETFs and a bond allocation that matches my age.

    I question the reader shifting out of XIU (TSX 60 equities) – when equities take a bath (like yesterday), that was the perfect time to be a buyer.

    • 2 Cents

      Absolutely the markets are always risky. But I think at least some would agree that the risks of owning stocks and bonds are elevated today compared to two years ago. Yesterday’s shellacking was ugly, but we know that it’s just as likely to be the beginning of more downside as it is to be the end of it. No one knows for sure.

      Even if the Americans reach a deal on the debt ceiling, their debt problems will not disappear. The problems in Europe continue to worsen as well. This is not to say that the markets must go down. They’ve shown how resilient they can be. But yesterday is a prime example of how debt doesn’t matter – until it does.

      For the record, that reader was out of equities before yesterday and was therefore in a position to buy if he chose to do so.

      Thanks for sharing your thoughts! ๐Ÿ™‚

  5. BeatingTheIndex

    I am staying the course, no market timing and day trading. What is the worse that can happen? 2008 all over again? we will recover because we always do.

    Debt crisis wise, I think they will raise the ceiling and the focus will be back on Europe. By the end of the year this should be behind us and investors will be complaining about the slow growth, which is fine. Many emerging economies are doing just fine, it helps to look at the big picture sometimes.

    • 2 Cents

      I really hope we don’t get 2008 all over again, but you’re right. We will recover eventually. I just worry that it might not be in time for those who need the money from their investments to retire. The quick recovery from the 2008 crisis was largely driven by the same factors that caused the crisis in the first place: easy monetary & fiscal policy, lax regulations and socialized losses for the financial industry. As a result, I worry that we may not recover so quickly when the next crisis hits.

      I would be surprised if all of the problems in Europe and America disappeared by the end of the year. They are just too big and the political and public will to solve them is missing in action. While some emerging economies are doing well, there are chinks in China’s armour in the form of excessive local government debt, over-building in the real estate sector, and lots of risk to the banking system.

      Thanks for your input Mich! ๐Ÿ™‚

  6. Rob Bennett

    we will recover because we always do.

    I agree with this, BeatingTheIndex. But I will try to express my thought as to why that is not an entirely satisfactory response to the concern being voiced (at least not in all cases, in my assessment).

    Collectively, we will recover. It does not follow that all individuals will recover. My read of the historical stock-return data tells me that we are likely going to see a 65 percent price drop sometime over the next few years. I believe that we will make up all that ground over the following decades. But for those who remain heavily invested in stocks it could mean a delay in their retirements of 10 years or 15 years or 20 years.

    Some of us only have 30 years to finance a retirement (Some have college debt and are not able to save much until age 35 or so). If you have three decades to do the job and you make no forward movement for 20 years because you bought into Buy-and-Hold strategies, the consequences are grave.

    There’s always someone else doing better because they had a low stock allocation at times of high prices and were able to obtain super-high returns by buying when prices were super-good. But that doesn’t help the fellow or gal who got wiped out as a result of sticking with a high stock allocation even when prices were off the charts (as they are today).

    When people say that stocks are always best for the long run, there’s an artificial, hyper-technical sense in which that is so. It is not the case, though, that those who refuse to take prices into consideration end up being able to retire at a reasonable age just because collectively as a nation we someday recover from the hit that letting prices get too high always brings on.

    But I could be wrong! Lots of smart and good people think I am out to lunch re all this stuff!


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