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.

Link to Retirement Calulator

 Here is a link to a neat Retirement Calculator. I like that one can change the numbers in the yellow coloured fields. The result does not take inflation into consideration, at least not that I can tell, but it is a handy quick estimate of how long your savings will last.

Risk free comes at a price

If you want a risk free investment, buy a GIC. You may only make 3.5% on a four year term but at maturity all your investment will be returned. Oh, it may have lost buying power if inflation runs at more than 3.5% but you will get all your money back. Guaranteed.

 

If 3.5% is not enough yield, why not take on a little risk and put 2% of your portfolio in IGM stock. IGM is off its recent high by 21.2%. It is selling for $40.71. A price that puts it in bear territory. Buying today, you will enjoy a dividend income of 5.53% for the next four years. That much is pretty much guaranteed. IGM is not overly generous with its dividend. Its payout ratio is quite reasonable. The dividend should be secure.

Morningstar lists IGM on both its Canada Core Pick List and its Canada Income Pick List. Only eight stocks receive this buy recommendation in the recent monthly report. At the moment, Morningstar gives IGM four stars. This means Morningstar believes IGM will most likely reward investors with capital gain.

During the March 2020 bear market, IGM dropped in price to about $21. Clearly, the IGM price can fall a lot more. A paper loss is possible. On the bright side, it climbed out of the depths of the 2020 bear market in little more than a year. If you can afford to hold, its price should recover. (IGM was selling for $43.20 at market close Mar. 7th, 2023.)

My take

I ended up buying some REITs wrapped up in the ETF RIT. I the units were $17.95 with a yield of 4.5%. These units partially replaced the units of XRE that I sold at the beginning of the recent correction. I sold the XRE high and I bought the RIT at a much lower entry price point.

One thing you never get with a GIC is a profit surprise and with a yield of only 3.5% you are hardly being paid to be patient or otherwise.

Make a note to yourself and revisit this advice in four years. See if I was right when I pronounced RIT or even IGM a better investment than a GIC. With a GIC you have almost locked in a guaranteed loss. With RIT or IGM, but especially RIT, I like to think I am risking making a tidy capital gain and banking a generous dividend. That is a risk with which I can live.

Don't time the market

I subscribe to Insights, a blog by Goodreid Investment Counsel. The following is a window into the quality advice in that newsletter. If I were looking for an investment advisor, the team lead by Gordon Reid would be among my top contenders. At times, I have found the advice in the Goodreid letter to be what I would call "wise and financially astute."

Myth: Timing the Market Results in Higher Returns

It is true that if you could consistently time the market such that you bought securities at their trough and sold them at their peak you would earn higher returns, so why is this a myth? To answer this question, we can look at several variables. 

To start let’s examine the length of the business cycle. If we can predict the length of the business cycle or better yet the length of each phase in the business cycle, then we will know when we are at the peak (and therefore should sell) and when we are at the trough (and therefore should buy). 

In the U.S. we can observe that the average length of the typical business cycle is 4.7 years, but varies greatly from cycle to cycle, with the standard deviation of the average cycle length being 2.2 years. (Marmer, 2016)  With most cycle durations deviating up to 47% away from the mean, it becomes very difficult to predict each cycle length with any real accuracy. 

To compound this problem the average stock market cycle in the U.S. is 7 years long with a standard deviation of 3.1 years. (Marmer, 2016) With both the business cycle and stock market cycle having differing, and highly variable durations it becomes nearly impossible to consistently predict how long each phase will last in order to sync up your trades to maximize profits. 

We can also observe the difficulties of market timing on a more granular level. During 2019 the TSX had a price return of 19.1%, which is a figure you may have seen discussed in the media as we entered the new year. What you might not know is that of the 251 trading days on the TSX in 2019, the 19 best days account for just over 94% of the annual return. Obviously, it would be next to impossible to predict which of the 19 days of the year would yield these returns. 

Instead of timing the market it's better to develop a disciplined strategy to be in the market that considers both your willingness and ability to take risk. We know that markets go up over the long run so don’t let your portfolio suffer by potentially missing the relatively few days (in this case 19) of the year that can drive your overall return.

What is a correction? . . . a bear market?

A friend, new to investing, asked me to explain a correction. I don't have to do it as Derek Fuchs, writing for Scotia Wealth Management, has beaten me to it: What is a Correction?. The important points that I took from Fuchs piece:

• A stock market correction is defined as a 10% decline from the peak.
•  A stock market correction historically occurs every one to two years.
• Most stock market corrections are here only for a short time. Some have lasted only a few weeks. The average correction lasts around two months.
• While the 10% decline is considered a correction, most have an average decline of around 13%.

What is a bear market?

• A bear market is different than a market correction. A bear market is one where the market has declined 20% since the previous peak.
• Most corrections do not become bear markets.
• Typically, one in five corrections will become a bear market.
• A bear market can last normally around a year, with the average closer to 15 months; they can also be much shorter than that.

The proper investor response to corrections or bear markets.

• The rebound from these declines can often be swift, dramatic, and offer some of the best time to invest.
  

Try to buy low but not the lowest

When stocks I having been watching fall into correction territory, that's a time to buy. An investor friend told me not to go all in with the first purchase. Keep some cash in reserve to give yourself the option of buying more if the price continues to tumble.

A lot of folk hesitate when faced with a buying opportunity. They want to to time the market. They want to buy at the moment the stock hits bottom. This is almost impossible. The bottom is only clearly the bottom when the stock is well into recovery. Many claim, with good reason, that buying during the recovery is the best way to play a bear market.

Look at the chart of the CIBC stock price. The high for the year prior to the March 2020 crash was approximately $115.87. A correction kicked in when the CIBC stock dropped 10% to $104.28. If one bought some CIBC at the 14% correction mark, it would have been about three months before the stock revisited the correction purchase price. That's not a long time if you consider it would take almost a year for an investor who bought at the high to see his money returned.

The CIBC stock bottomed out at about 42% off its high. If you made your second buy at the 32% down level, you wanted to be fairly certain the stock price was recovering, you would have walked away with a real steal. The stock would have been selling for approximately $78.80. The recovery paused at this point, a little bad luck, these things happen, but you still would have climbed into the green on the second buy within weeks.

What have we learned? I'm not really sure. I do know my wife and I made out very nicely during the March 2020 crash. I bought the correction. She bought the bear. Now, to check some more stocks and some more charts. At some point, I believe there is a lesson here.