What’s most concerning is the markets are quite complacent considering there is an excess amount of uncertainty out there
Author of the article:
Martin Pelletier
2022 could very well be a year of volatility, writes Martin Pelletier. Photo by Getty Images It’s that time of year again when benchmarks are measured, compared and wiped clean, while we pundits provide our customary market outlook.
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It’s a bit odd that we all pick some arbitrary day once a year for a fresh start, a chance to measure our successes against our failures and identify areas in our life that we want to change. Wouldn’t it be much easier to do so on a daily basis?
By holding onto the past, we’re essentially guaranteeing future failure by using it as an excuse to give up and not do better.
Imagine how liberating it is to let the past go and start afresh, realizing there’s an infinite number of second chances given to us moment by moment. Think about this when you read that infamous disclosure about past performance not being indicative of future performance.
Therefore, making desired changes and sticking to them on a daily basis can be a powerful way to transform your longer-term goals and objectives as well as improve your chances of meeting them.
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The best time to buy insurance is when it isn’t being priced into the market
Managing a portfolio should not be any different, which means learning from your mistakes, not feeling guilty, and immediately correcting them instead of hoping the market will do it for you. This mindset will prove vital in 2022, especially as it could very well be a year of volatility.
What’s most concerning is the markets are quite complacent considering there is an excess amount of uncertainty out there, from the risk of central banking policy errors to rocketing commodity prices causing a full blown energy crisis in Europe to geopolitical risks coming out of Russia and China.
That said, the best time to buy insurance is when it isn’t being priced into the market, and there are currently a number of inexpensive ways to protect portfolios by implementing a bit of risk management.
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Doing so will remove anxiety and the chance of overreacting to any mistakes made, and, trust me, there will be mistakes made. This will also give you the chance to maintain those positive daily habits you want to reinforce into your portfolio.
To get you started, here are a few ways we’ve been positioning portfolios heading into another tomorrow and a new year.
Over the past few months, we’ve been reducing our broader S&P 500 exposure while keeping our American dollars. The index, which is heavily weighted to technology stocks, experienced another euphoric year, setting 70 new all-time highs, the second highest in its entire history. We have concurrently been rebalancing into underperforming areas such as global value.
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We don’t like the duration exposure of the technology sector, which is a lot like our Canadian housing market. It is good to have some exposure, but not too much given the sector’s ability to keep going higher on central bank liquidity, but this can’t go on forever, so we’ve been selling down our position slowly over time.
Meanwhile, we’ve been keeping our U.S. dollar exposure, which represents a healthy 40 per cent of our in-house Risk-Managed Balanced Growth pool fund. This is because the U.S. dollar provides an excellent hedge during times of uncertainty despite what the cryptos may tell you.
Offsetting this is our strong exposure to energy and commodities. Although they will be volatile themselves, especially as governments use variants and the threat of lockdowns as a way to control inflation, we worry supply shortfalls will cause prices to go much higher in the longer term.
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As a result, we have given energy and commodities an 11-per-cent exposure, which is inline with the S&P/TSX composite. This weighting makes up a large part of our Canadian equity exposure, inflating its weighting to 23 per cent, because we see better growth from comparable financials, telecommunications, consumer staples and other sectors in the U.S. and Europe.
More On This Topic Looking for opportunities amidst the Omicron noise and policy-makers’ nosiness Investors should take advantage of the freedom they have to go where they want Martin Pelletier: Inflation volatility, central bank policy error are the two biggest risks facing markets — so buckle up We worry about bonds in the upcoming year with yields being so low, so our duration exposure is short term and our overall weighting is at a record low 16 per cent. We’ve offset this with a bit more dry powder, with cash at six per cent heading into the new year. We also have a 14-per-cent weighting to custom-built structured notes offering downside protection ranging from 25 to 40 per cent and capped upside with yields ranging from five to 12 per cent.
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Article content Finally, it doesn’t hurt to rebalance by taking profits in the new fiscal year since there is a chance the federal government will change the capital gains inclusion rate, especially as it tries to find ways to fund its massive fiscal deficit spending as the Bank of Canada unwinds its bond purchasing.
More importantly, make sure you undertake some advanced wealth, estate and tax planning sooner rather than later.
With that, be smart, stay positive, always play the long game and invest wisely.
Financial Post
Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc, operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning.
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