How to recognize "too much risk."

I read this in a Morningstar publication: If you feel the losses suffered by your portfolio are too much to handle, you are probably taking on too much risk.

Or as I tell folk: If you are concerned that you may need the money you are investing in the market, don't! Only invest what you can afford to lose.

If you have followed those two pieces of advice, you will come through the present market turmoil just fine. 

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In the spirit of the above intro, over the past year I have been cashing out some investments. I have a plan, a portfolio allocation, and I was holding more of some stocks than originally planned. I sold the excess. I deposited the resulting cash in a daily interest money market account (TDB8150).

I am watching the crashing stock values with a small war chest of investment cash and a new portfolio allocation model. I am tracking the crashing stocks using a spread sheet. When the spread sheet indicates my cash will cover my dream purchases, I will buy in. Of course, it is possible the market will not dip that low and I will be left holding cash. I can live with that.

And what stocks am I watching?

• BAM.A (Brookfield Asset Management Inc.)
• QBR.B (Quebecor Inc.)
• QSR (Restaurant Brands International Inc.)
• RIF (CI Canadian REIT ETF)
• VGH (U.S. Dividend Appreciation Index ETF (CAD-hedged))
• VIDY (Vanguard FTSE Developed ex NA High Dividend)

Note: My list will not be the same as your list. For instance, there are no banks on my wish list. Why? I am fully exposed to the banking sector. The same goes for pipelines, telecoms and utilities.

I sometimes fail to follow financial advice

 I follow the Canada Income Pick List published at the first of each month by Morningstar and carried by TD WebBroker in the reports section. I own many of the suggested stocks but not all. I sold my IGM. That proved to be a good move. I also sold my Restaurant Brands International. That proved to be a very poor move.

My point? It can be very hard to follow even the very best advice when it conflicts with one's personal beliefs. With a lot of companies, I do not have strong feelings. Oh, I like Telus and have mixed feelings about Bell. I see TC Energy as a winner and CIBC as well. While ScotiaBank, in my mind, is always struggling. Still, I hold all those recommended companies in my portfolio.

But IGM and Restaurant Brands are in a league of their own. For numerous reasons, I feel very negatively about both. Investing is not just about making money. It is also about living comfortably. I could not hold either of these today and feel comfortable but I feel very comfortable NOT holding them.

If Restaurant Brands should lose enough in market price, I could see holding QBR.B at some point. As for IGM, it is out and will stay out of my portfolio for the foreseeable future.

The pushmi-pullu stock market

Do you recall Dr. Doolittle's pushmi-pullu (pronounced push me-pull you)? The stock market is a bit of a pushmi-pullu creation but a mix of a bull and a bear rather than than a couple of llamas. 

The bull end of our creation has been leading the way for the past few years. But the bull has finally run out of steam and the bear now has control.

Bear markets are not a surprise. Bear markets are simply part of our investing universe. Some call bear markets rare. I'd rather say they are not as common as bull markets but they do appear with a certain regularity.

Historically, bear markets do not last as long as bull markets but psychologically they seem to carry more clout. For this reason, many people are tempted to get out of the market during a serious downturn. This is usually a mistake locking in losses.

No one knows when market sentiment will flip from bear to bull. When it does flip, it is usually quick. If you are out of the market, you may miss some of the biggest gains as the recovery kicks in. 

I get through bear markets by focusing on the benefits of being invested during both bull and bear markets: dividends. Today Enbridge is yielding 6.7% and the yield promises to go even higher over the coming days and weeks (assuming the bear market continues to gain strength.)

The TD bank is yielding 4.1%, while the CIBC yielding 5.2%. If one likes REITs, the ETF RIF is yielding 4.9% today. Telus is yielding almost as much at 4.8%. Emera, a much loved utility, is at 4.6%. I may be getting greedy but I think this bear has some still untapped strength. Stay the course and one my well be rewarded with some truly generous dividends and then some solid capital gains as stocks slowly regain their former values. 

The Morningstar star system reflects how a stock's price today compares to its fair market value as calculated by Morningstar. The more stars the more attractive the price. With the market collapsing, more and more stocks followed by Morningstar are getting into four and even five star territory.

Stocks I'm watching today

There are a number of stocks and ETFs that I follow rather closely. If the price drops my interest grows. If it drops enough, usually something in excess of ten percent off it high of the past year, I buy a little. 

If it drops another ten percent I consider buying more but at this point I have some exposure and I don't feel the same pressure to buy. If it surprises everyone and stops dropping and starts climbing, I am already on for the ride. If I can muster the strength to resist, I try and put off a purchase until it has dropped 20% or more since my initial purchase. At this point, the pull to add to my holdings is almost impossible to resist.

BAM.A: Brookfield Asset Management-A LV (BAM.A is down about 23.73% from its high of the past year.)

BMO: Bank of Montreal (BMO is down about 17.45% from its high of the past year.)

CM: Canadian Imperial Bank of Commerce (CM is down about 19.61% from its high of the past year.)

RIF: CI Canadian REIT ETF (RIF is down about 17.45% from its high of the past year.)

MFC: Manulife Financial Corp (MFC is down about 18.87% from its high of the past year.)

QBR.B: Quebecor Inc CL-B SV (BMO is down about 19.11% from its high of the past year.)

QSR: Restaurant Brands International (QSR on TSX is down about 25.03% from its high of the past year.)

TD: Toronto Dominion Bank (TD is down about 16.01% from its high of the past year.)

XUS: iShares Core S&P 500 Index ETF (XUS is down about 18.92% from its high of the past year.)

ZRE: BMO Equal Weight REIT Index ETF (ZRE is down about 16.84% from its high of the past year.)

Except for BAM.A, all these stocks deliver a generous dividend. As a retiree, dividends, generous dividends, are very important to me. The large Canadian banks are wonderful stocks to have in a retirement portfolio as these banks, other than National Bank, have a history of never cutting or reducing their dividend. Bank dividends promise solid income. TD is yielding 4.93% at today's close.

The two REIT ETFs are also fine places to park retirement investment funds. I am betting that these ETFs will not cut their dividend payment by more than 15% no matter how poor the economy. I could be wrong, I'm human, I make errors, but in this case I feel quite confident that I am right.

Turning a sow's ear into a silk purse

One often reads how awful it is to lose money in the market. Well, it's true; it is awful. But, and it is a big but, the passing of time eases the pain—and I mean completely eases the pain. I bought some Manulife stock a few months back. Since then it has fallen on hard times. The stock has diminished in value to the point that it is living in bear territory and promising to put down roots there.

So, am I going to sell, accept my loss and move on? No. Absolutely not. The price today is the price. Period. But, this new price comes with a few perks. A big perk is the yield: 5.88%. If I were to sell, where could I move my money and earn as much income?

Furthermore, at its new, and arguably improved price, Manulife has more room to grow in value. If it hits the target value envisioned by financial advisors, even taking as much as three years to get there, I will realize $3.96 in dividends for each share, plus I'll benefit from an increase of $4.78 in stock value. This is a total gain of $8.74 or 13% annually when calculated over three years.

If I insist on dwelling on the inflated price that I originally paid, then I clear $6010 over three years for an annual gain, dividends included, of 8%.

The trick to winning in the market is to buy decent firms paying good, solid dividends and then holding as planned. Play the long game. Do not fritter away your profits with too many trades. My Manulife is a sow's ear today but in three years I hope to see it replaced by a silk purse.

A truly cool calculator

 https://www.canadastockchannel.com/compound-returns-calculator/

 

Dropping IGM and putting RIT in my sights

Recently, I was eager to increase my holdings of IGM and I did. I more than doubled my holdings. 

Then within just days I sold all my IGM, getting out with all my money but just barely. Why? One, IGM was dropping farther and faster than I ever imagined it would. And two, while it was wilting, another and more attractive investment was on the horizon: RIT.

RIT is an ETF which gives one a managed mix of mostly Canadian REITs with about ten percent exposure to the U.S. REIT market. It just seemed like a wiser place to park my money. One cannot get locked in too tightly to one's plans. Stay alert.

I bought RIT after its price had corrected. I kept some powder dry to buy more should it enter bear market territory. As it is, I have a dividend income of 4.5% on this buy. I'm happy no matter what happens to the price in the coming days.

IGM is still a favoured Morningstar investment for Canadians seeking income and it is still featured in the Morningstar Canadian Core Portfolio. For this reason, IGM is still on my radar but it will have to get deep into bear market territory before I bite. IGM is now down almost 30% from its high of the past year.

The financial markets are in quite the turmoil today. These types of markets usually are around for days and weeks, sometimes even months. In today's financial climate, IGM could fall a lot further.