I have published many articles explaining what attracted me to ETFs: their low cost, return potential and ease of risk management. So, what I would like to emphasize here is the conviction that I believe is required to make the most of an ETF model portfolio strategy.
Emotions and investing do not go well together. As Warren Buffett famously said, fear and greed are the investor’s worst enemy. Part of the attraction of ETFs for me was the fact that the plain-vanilla, passive market indexes eliminated the whims and emotions of active portfolio managers. I found the logic compelling. If doing better than the index is so difficult, then why not just buy the index?
But using ETFs for portfolio management is not a singular guarantee of success.
The portfolio construction process is critical to achieving solid results over time. The process begins with establishing a benchmark that is the foundation for selecting ETFs. The benchmark should hinge on an investment policy statement that outlines asset allocation parameters and risk profile. The statement also should speak to the portfolio manager’s investment style: top-down, bottom-up or contrarian.
ETFs will do their job by hugging index returns, but a portfolio manager who lacks conviction in their skills can easily lack the discipline to stick to their process over time, especially during a crisis or a bear market.
In tough times, the temptation can be great to ignore investment policy guidelines and second-guess investment decisions and management style, thus opening the door to transactions motivated by past performance or questions from insecure clients.
At times like this, keeping clients invested and focused on their long-term financial plan is critical. Rebalancing portfolios even as markets drop also is key: a recent actuarial valuation of the Quebec Pension Plan found that proper rebalancing could add up to 40 basis points of return, depending on the portfolio.
Talking to clients during volatility is extremely important. Clients who suspect that their portfolio manager questions his or her own decisions or does not fully understand portfolio performance attribution will look elsewhere.
Having an investment committee in place to discuss trading ideas within a portfolio can be helpful in maintaining conviction in a long-term investment strategy. I choose people from inside and outside my firm to discuss asset allocation decisions and ETF selection. I am not necessarily looking for people who endorse my investment decisions; rather, I am looking for an insightful exchange. Sometimes, these discussions will lead me to hold off on a transaction or discard it; but, in every case, the last call is mine.
Cultivating and sustaining conviction in an investment strategy means building and adhering to a solid portfolio-management process. But conviction will not get you far if it isn’t paired with discipline. Once you have a process in place, you need to stick to it. All kinds of temptations will come along to invest outside of your core investment thesis. Resist them. Discipline is about sticking to what you know and believe in — completely.
Once a disciplined process is in place, the final test of your conviction is to ask:“Do I invest in the same portfolio I’m telling my clients to invest in?” The answer should be:“Yes.”
Mary Hagerman, M.Sc., FCSI, CIM, Pl. Fin., is an award-winning investment advisor and portfolio manager in the Montreal office of Raymond James Ltd.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
