Tom Bradley: When market trends persist for a long time, portfolios tend to drift toward what’s in vogue — bringing a higher level of risk
Published Apr 23, 2021 • Last updated Apr 23, 2021 • 4 minute read
Recently portfolios have been creeping towards technology and higher-risk investments such as unprofitable disruptor companies, biotech, cannabis, IPOs and SPACs and anything to do with Bitcoin. Photo by Blair Gable/Reuters files Is your portfolio creeping? Does it reflect the plan you put in place, or does it fit more closely with what’s dominating your newsfeed?
Advertisement 2 This advertisement has not loaded yet, but your article continues below.
THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLY Subscribe now to read the latest news in your city and across Canada.
Exclusive articles by Kevin Carmichael, Victoria Wells, Jake Edmiston, Gabriel Friedman and others. Daily content from Financial Times, the world’s leading global business publication. Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account. National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on. Daily puzzles, including the New York Times Crossword. SUBSCRIBE TO UNLOCK MORE ARTICLES Subscribe now to read the latest news in your city and across Canada.
Exclusive articles by Kevin Carmichael, Victoria Wells, Jake Edmiston, Gabriel Friedman and others. Daily content from Financial Times, the world’s leading global business publication. Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account. National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on. Daily puzzles, including the New York Times Crossword. REGISTER TO UNLOCK MORE ARTICLES Create an account or sign in to continue with your reading experience.
Access articles from across Canada with one account. Share your thoughts and join the conversation in the comments. Enjoy additional articles per month. Get email updates from your favourite authors. When market trends persist for a long time, portfolios tend to drift toward what’s in vogue. This can generate good returns in the short run but comes with, sometimes unknowingly, a higher level of risk.
Think back to how much technology (and Nortel) there was in Canadian portfolios at the end of the tech boom in 2000. Or how big a role oil and gas stocks played when the oil price was north of $100.
FP Investor Canada’s best source for investing news, analysis, and insight on investment strategies, stocks and more.
By clicking on the sign up button you consent to receive the above newsletter from Postmedia Network Inc. You may unsubscribe any time by clicking on the unsubscribe link at the bottom of our emails or any newsletter. Postmedia Network Inc. | 365 Bloor Street East, Toronto, Ontario, M4W 3L4 | 416-383-2300
Recently, the migration has been towards technology (again) and higher-risk investments such as unprofitable disruptor companies, biotech, cannabis, IPOs and SPACs and anything to do with Bitcoin.
A free lunch My use of the word creep has a negative connotation here and that’s intentional. For sure there are good reasons why a portfolio should shift, but when you stray from the plan that best fits your goals and personal situation, it often means you’re less diversified.
Advertisement 3 This advertisement has not loaded yet, but your article continues below.
Why does this matter? Well, diversification is the only free lunch in investing. Holding a mix of assets that is driven by different economic factors, and generates returns in different ways at different times, means you get a return with less volatility, and little or no capital risk.
If you’re deviating from your plan by tilting heavily in one direction, it should be done knowing that less diversification comes with added risk. And it should be intentional, not the result of market moves and related product promotions.
Let’s look at where to find portfolio creep.
Asset mix Stock markets have been good for a long time, which means many portfolios are more heavily invested in stocks today than was originally intended. This makes sense with interest rates being so low. Certainly, our clients hold a higher proportion of stocks than was considered appropriate decades ago. The key, however, is to make sure your portfolio isn’t too unpredictable and volatile for you to handle. There’s no benefit to owning more stocks if you can’t stomach the market dips and are prone to selling when prices are down.
This advertisement has not loaded yet, but your article continues below.
Article content Fixed income There’s some serious creep going on in the stable part of portfolios. Investors have shifted from defence to offence, willing to go anywhere in pursuit of yield. In lieu of government and high-quality corporate bonds, portfolios are holding riskier bonds, direct lending funds, structured products, preferred shares, REITs and dividend-paying stocks. These are all perfectly good asset types but are highly correlated to the stock market. They can’t be expected to provide cover during market meltdowns.
Stocks In the equity markets, creep occurs when a stock or industry does well and becomes a bigger part of an index. When Nortel skyrocketed, its weighting rose to the point where it accounted for a third of the S&P/TSX Composite Index. Similarly, oil and gas stocks were over 20 per cent in their heyday. Without doing anything, index investors saw their exposures change significantly. This was also true for active investors, many of whom were anchored on the index weightings.
This advertisement has not loaded yet, but your article continues below.
Article content The drift in equity portfolios is best measured by looking at weightings by industry as opposed to location. The country where a company is headquartered is less important than it used to be. When countries have a good (or bad) run, it’s usually because of the makeup of the market as opposed to any unique economic or political factors. For example, the leadership of the U.S. market in recent years has been driven by the preponderance of technology companies in the index.
The Davids can beat the money management Goliaths — as long as they stick to their strengths The last 12 months have been wonderful to investors, but don’t let the end-date sensitivity fool you Three words that can help investors take advantage of stock market mayhem When it comes to SPAC investing, the house always wins. The public, not so much Advertisement 6 This advertisement has not loaded yet, but your article continues below.
You should be aware of how these cyclical shifts in industry weightings can impact some indexes. In smaller countries like Canada, market indexes can get out of whack and look more like a specialty fund (i.e. resources or technology) than a broadly diversified portfolio.
How do you know if your portfolio has drifted? The best way is to compare it to the industry weightings in a World index or global equity ETF. These indexes, which can be found on any ETF website, are subject to creep too, but overall are more balanced and reflective of the economy.
If you’ve strayed significantly from what your plan calls for, make sure it’s justified and hasn’t significantly changed your risk profile. And make sure it’s of your own doing, not a creeping portfolio.
Tom Bradley is chair and chief investment officer at Steadyhand Investment Funds, a company that offers individual investors low-fee investment funds and clear-cut advice. He can be reached at tbradley@steadyhand.com.