Why do we do what we do? This may sound like a deep philosophical question but lately it has been asked of us many times. In most cases, it is aimed at acquiring a better understanding of why we are holding certain investments at that particular point in time. What is causing us to buy some investments and to sell others?
Technology provides us with the ability to observe economic changes in a much more timely fashion than ever before. It used to be that economists would point back at least three months and observe that the economy was either expanding or contracting “back then”. It really wasn’t very helpful. Now, we can observe these economic environments on a month-by-month basis.
Using our economic signals, we have found that there are times when we should prefer to hold more bonds and at other times we should prefer to hold more stocks.
As an example, from August 2014 through July 2016 (two years) the economy spent more time decelerating than it spent advancing. This was a tough time for stocks but bonds did quite well. In fact, long term bonds rallied to all-time highs in late June 2016 and we sold our long-term bonds at that time. Since then, the long-term bonds have declined quite significantly and stocks have increased.By selling our long term bonds in June, we locked-in a nice short-term profit.
As of early March 2017, our signals have flipped.The economic signal that we follow now shows signs of slowing. This suggests to us that it is timely to reduce stocks and to increase our bonds. Doesn’t that sound like the old adage to buy low, sell high?
So, here’s what we are holding within each strategy:
Source: Markit Economics
Fixed Income Strategy: holding the iShares Canadian Universal Bond index, Horizon Global Risk Parity ETF and some cash. The risk parity exchange traded fund (ETF) is a relatively new addition to the Fixed Income Strategy. We want to hold an investment that behaves similar to bonds and that has the ability to post positive returns independent of interest rates.
Canadian Equity Strategy: This strategy holds shares in individual companies. We have been paring back on companies that are economically sensitive and building some cash.
A standout performer for us has been Canadian Tire which reported strong sales and earnings in February. This helped propelled the stock to new all-time highs on February 17, 2017. According to Management’s Discussion and Analysis, “Canadian Tire is strategically focused on developing technological capabilities that will drive the omni-retail experience for its customers.” This includes creating leading edge solutions at their innovation lab at Communitech in Kitchener-Waterloo.
Super MoVa Tactical: Since August we were in Canadian stocks, then international stocks and then back to Canadian stocks. Recently, this strategy moved out of stocks and into bonds. Specifically, we are invested into the Bank of Montreal Long Federal Bond Index ETF.
Super MoVa All Equity: Currently holding the First Asset Morningstar Canada Value ETF.
Most of our portfolios are made up of three of the four strategies listed above. We always want to hold some bonds and some stocks. The Fixed Income Strategy is used to provide exposure to bonds. The stock exposure is acquired through either the Canadian Equity Strategy or the Super MoVa All Equity Strategy. The Tactical Strategy is used to shift portfolios toward more stocks when the economy is accelerating or into bonds when the economy is decelerating. Our goal is to help build your portfolio and then preserve that growth during times of volatility.
If you would like to discuss this further please call Matthew Phillips at 519-780-4171
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