Why I Love My Job (Flattening The Curve)

But first, Happy Canada Day friends! We live in a great country. Not perfect, by any means (a bit chilly in the winter for us older folks, perhaps), but given the current situation, I can't think of any place that I would rather be living.

But that is not what my blog is about today. 

I get excited when our younger clients take an interest in investing. In this particular case, a 20-something year old who's grandparents were clients as well as his aunts and uncles, with a relatively small portfolio, but a great starting point from which to get building.

"Hello Scott, I finally worked up the courage to start building my own portfolio. So far I’ve identified BMO, Manulife and Suncor as a good place to start if I can get them at the right price. However my reasoning does relate back to the fact that BMO and Manulife both pay dividends. Originally I was looking to hold a GIC, however I think holding the above stocks might see a long term value change if things go my way as well as some dividend cash in the mean time. I was wondering if you have any idea whether either would be looking to cut their dividends due to this covid situation. All the best and hope you are staying safe."

My response:

We are all well here, hunkered down, but less so as the province and GTA open up. Hoping you and all your family are well!

Congratulations on taking a big step forward and thinking about your investment portfolio. There is a lot to consider. As I am uncertain as to how much investment management education you might have, I am going to offer up a few things to consider, but at any time, I am wide open to a much more detailed conversation with you, at your convenience.

1) What are your goals? What is it that you want to accomplish with your money? Obviously you want it to grow, but it is important to establish what you want to grow it to do for you and the timeline for doing so. Condo or house purchase, retirement, etc., I find it helpful to think in terms of where you want to be in 3, 5, 10, 20 year time frames.

2) We all have to take risk if we want to grow our money faster than the annual increase in our cost of living (inflation). I commend you for thinking beyond the GIC (which is pretty close to "risk-free"), which, if it earns 1%, is going to come up short relative to the 2% average annual inflation rate. Remember, your inflation rate may differ somewhat from the Stats Can average based on where you consume and what you consume (and the costs associated with your consumption of goods and services).

3) We are in somewhat unprecedented times. Economies are seriously depressed at the moment and the uncertainty going forward is enormous. Some more optimistic folks (economists, investors, politicians) believe that this will all bounce back rather quickly (a "V" shaped recovery). Personally, I tend to side with the critical thinker crowd and believe it is going to be more of a "W" shaped recovery. Some pretty smart people actually think it may be more of an "L" shaped recovery and we might experience a decade of low growth.

4) Consider that it is going to take a long time for consumers to be comfortable just leaving their homes just to buy basic supplies, let alone travel or dine out or be entertained (theatre, sports, etc.). That is going to continue to be a huge economic hit. Jobs lost in the hospitality sector are likely not coming back in a hurry. Household incomes could take be jeopardized after all the government sponsored programs dry up. Consumers would certainly be spending less. A vaccine discovery might ease this situation, but it will take time and in the interim there will be much damage done to the economy. There is an enormous amount of household, corporate and government debt out there: how will that debt get repaid if consumers and businesses are functioning at reduced capacity, which is highly likely? Financial services (banks and insurance companies) could take a big take a hit, I would say that could put pressure on their dividends. My business partner, Paul, who does the bottom-up research on the companies that we (High Rock) monitor suggests that banks are racking up provisions for credit losses, which will likely turn into "Gross Impaired Loans". If capital falls, they will be forced to raise equity (share issuance) or cut dividends (as did Wells Fargo). Share buybacks  (which helped drive prices higher through to 2019) have also been curtailed. Paul says that BMO is very extended in the energy space and received a poor rating from the Fed last week. It would not surprise him to see a dividend cut.

5) Given all the uncertainty, my question to any investor is how much risk are you comfortable taking? Try reading this on Suncor : https://www.fool.ca/2020/06/11/suncor-energy-tsxsu-stock-0-or-40/ for example. Suncor has already cut its dividend.

6) The portfolio that we manage for you is very broadly diversified, by owning 6 equity index ETF's that cover the global range and own thousands of various companies through many sectors. Owning individual companies in only 2 sectors increases the risk (but also the potential return), but you have to weigh that out against your long-term goals. The thing about diversity is that if a company is forced to cut its dividend, it will have its stock punished by investors (see MFC in 2007-09)

(It never recovered), but if you own many companies in a relatively small and diversified way, the impact is diminished significantly. If it was 1/3 of your investment, that would be a big hit and very difficult to recover from. About Manulife now, Paul says : "Guaranteed floor investment products (protected from downside risk) sell like crazy (expensive, but good revenue source for Manulife) but they produce negative convexity, which means that if equity markets drop, Manulife gets doubly hurt."

7) The portfolio that we manage for you now is positive by about 1% so far in 2020 (at the half way point), despite most stock markets being negative (you also own the Nasdaq index ETF, QQQ, which is positive). That is also a result of owning a portion of your portfolio in bonds (balance) which are the best performing asset class this year (even though they may pay minimal interest, they are a safe haven in times of economic stress).

8) So once again, back to you to determine how much risk you are willing to take with your savings. With economic growth likely not going to get back to 2019 levels until 2022 or 2023, it is difficult to see corporate earnings (upon which companies are paying dividends or retaining them for re-investment and growth), with much upside potential (other than pure speculation, which is gambling and not investing).

9) My recommendation, at least for the time being, would be to invest your hard-earned savings in your balanced and diversified portfolio ( as my good friend Tony Chapman calls it: "flattening the curve") with High Rock and let us professionals (lots of experience, education, insight and fiduciary duty) help you build and steward your wealth in our risk-adjusted manner. We are wealth and portfolio managers, not investment advisors. There is a big difference.

10) There is a tendency among some market participants to want to try to “get rich quick” and so they start day trading, it is certainly a fad now (it was in 2000-02 as well).  This never ends well, for the majority: https://www.msn.com/en-us/money/topstocks/barstool-sports-dave-portnoy-is-leading-an-army-of-day-traders/ar-BB15oo0r.

11) As always, it is your money and as a young adult, ultimately your decision as to what direction you take, but I would suggest that you focus on your strengths and build your career around that. If you find that you want to become an investing professional, let me know, High Rock is always looking for good, sharp, young minds. In the end, it is about making a plan and sticking to the plan and reaching whatever goals that you set out for yourself.

Happy, as always, to discuss any of this in more detail if you wish!

Be safe, stay healthy!