Investment

Sideline is no place for investors, even in turbulent times – Investment Executive

Published

2 years ago

June 21, 2022

Exiting a rocky market rather than sticking it out can often lead to worse results for nervous investors, says Jack Delany, quantitative portfolio manager with the multi-asset team at Dublin-based Irish Life Investment Managers.

Delany said the temptation to cut and run can be strong, but markets favour those who dare to stay invested.

“It seems like a really natural response when your portfolio loses value to reduce risk and wait for better times,” he said. “But we know that over the long term, this can be a very costly strategy.”

Secret weapon

Speaking on the latest episode of the Soundbites podcast, Delany said investors dig themselves into a hole when they de-risk their portfolio at a cost, and then fail to reap benefits during the subsequent recovery. Rather than pull money out of the market, he suggests investors use risk-mitigation strategies, which he described as the smart investor’s secret weapon.

“These can be either explicit risk-reduction strategies that purchase protection against an underlying asset, or implicit risk-reduction strategies that allocate to more defensive exposures or that dynamically manage exposures at different points in the cycle,” he said. “Both of these approaches, though, can be combined to manage losses and deliver a smoother return profile for investors.”

The most common strategy is also the most powerful: diversification across equities, bond classes, regions and currencies.

Beyond straightforward diversification, he employs other tactics that deliver the potential for both protection in down markets and participation in up markets.

Several strategies

“Examples of useful strategies includes collar option strategies, where we use put options to protect against losses but still leave room for some upside participation; low-volatility equity strategies — long-only equity strategies — that target more defensive, lower-beta, lower-volatility allocations; and finally, tactical allocation strategies,” Delany said. These strategies allow investors “to systematically reduce their equity allocation when the outlook is not favourable or increase it when the outlook improves.”

The most successful investors wouldn’t eliminate systematic risk from their portfolio, even if they could, he said.

“The only way to completely insulate a portfolio from systematic risk is to invest fully in cash, and this is a strategy that simply won’t generate the returns, over the long term, that most investors are looking for,” he said. “Taking a risk is a necessity when it comes to generating returns.”

The trick, he added, is to invest intelligently.

“Robust asset allocation, underpinned by both qualitative and quantitative analysis, goes a long way to deliver that smoother return profile that investors want.”

Delany said the key to the asset allocation process is considering the objective risk constraints of the client and tailoring the design of the portfolio accordingly.

Optimizing the portfolio

“The considerations here can include risk and return, but also liquidity constraints, income requirements, whether the portfolio is being built for pre- or post-retirement investors and so on,” Delany said. “Once these points have been established, we utilize an asset allocation framework that focuses on positioning portfolios to deliver over the long term.”

Emotions will still play a role when markets start to fluctuate, but there are several ways to tame them.

“The key step is education, ensuring that investors are invested in portfolios suited to their risk appetite and that they fully understand the loss potential of their investments,” he said. “Advisors have a key role to play here, sitting down with the client and outlining these considerations.”

He said getting comfortable with market volatility risk and understanding risk tolerances will help reduce “sub-optimal emotional responses” when losses occur.

***

This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.

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Investment

Tesla shares soar more than 14% as Trump win is seen boosting Elon Musk’s electric vehicle company

Published

3 days ago

November 6, 2024

Anne Joseph

NEW YORK (AP) — Shares of Tesla soared Wednesday as investors bet that the electric vehicle maker and its CEO Elon Musk will benefit from Donald Trump’s return to the White House.

Tesla stands to make significant gains under a Trump administration with the threat of diminished subsidies for alternative energy and electric vehicles doing the most harm to smaller competitors. Trump’s plans for extensive tariffs on Chinese imports make it less likely that Chinese EVs will be sold in bulk in the U.S. anytime soon.

“Tesla has the scale and scope that is unmatched,” said Wedbush analyst Dan Ives, in a note to investors. “This dynamic could give Musk and Tesla a clear competitive advantage in a non-EV subsidy environment, coupled by likely higher China tariffs that would continue to push away cheaper Chinese EV players.”

Tesla shares jumped 14.8% Wednesday while shares of rival electric vehicle makers tumbled. Nio, based in Shanghai, fell 5.3%. Shares of electric truck maker Rivian dropped 8.3% and Lucid Group fell 5.3%.

Tesla dominates sales of electric vehicles in the U.S, with 48.9% in market share through the middle of 2024, according to the U.S. Energy Information Administration.

Subsidies for clean energy are part of the Inflation Reduction Act, signed into law by President Joe Biden in 2022. It included tax credits for manufacturing, along with tax credits for consumers of electric vehicles.

Musk was one of Trump’s biggest donors, spending at least $119 million mobilizing Trump’s supporters to back the Republican nominee. He also pledged to give away $1 million a day to voters signing a petition for his political action committee.

In some ways, it has been a rocky year for Tesla, with sales and profit declining through the first half of the year. Profit did rise 17.3% in the third quarter.

The U.S. opened an investigation into the company’s “Full Self-Driving” system after reports of crashes in low-visibility conditions, including one that killed a pedestrian. The investigation covers roughly 2.4 million Teslas from the 2016 through 2024 model years.

And investors sent company shares tumbling last month after Tesla unveiled its long-awaited robotaxi at a Hollywood studio Thursday night, seeing not much progress at Tesla on autonomous vehicles while other companies have been making notable progress.

Tesla began selling the software, which is called “Full Self-Driving,” nine years ago. But there are doubts about its reliability.

The stock is now showing a 16.1% gain for the year after rising the past two days.

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Investment

S&P/TSX composite up more than 100 points, U.S. stock markets mixed

Published

3 weeks ago

October 16, 2024

Anne Joseph

TORONTO – Canada’s main stock index was up more than 100 points in late-morning trading, helped by strength in base metal and utility stocks, while U.S. stock markets were mixed.

The S&P/TSX composite index was up 103.40 points at 24,542.48.

In New York, the Dow Jones industrial average was up 192.31 points at 42,932.73. The S&P 500 index was up 7.14 points at 5,822.40, while the Nasdaq composite was down 9.03 points at 18,306.56.

The Canadian dollar traded for 72.61 cents US compared with 72.44 cents US on Tuesday.

The November crude oil contract was down 71 cents at US$69.87 per barrel and the November natural gas contract was down eight cents at US$2.42 per mmBTU.

The December gold contract was up US$7.20 at US$2,686.10 an ounce and the December copper contract was up a penny at US$4.35 a pound.

This report by The Canadian Press was first published Oct. 16, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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Economy

S&P/TSX up more than 200 points, U.S. markets also higher

Published

4 weeks ago

October 11, 2024

Anne Joseph

TORONTO – Canada’s main stock index was up more than 200 points in late-morning trading, while U.S. stock markets were also headed higher.

The S&P/TSX composite index was up 205.86 points at 24,508.12.

In New York, the Dow Jones industrial average was up 336.62 points at 42,790.74. The S&P 500 index was up 34.19 points at 5,814.24, while the Nasdaq composite was up 60.27 points at 18.342.32.

The Canadian dollar traded for 72.61 cents US compared with 72.71 cents US on Thursday.

The November crude oil contract was down 15 cents at US$75.70 per barrel and the November natural gas contract was down two cents at US$2.65 per mmBTU.

The December gold contract was down US$29.60 at US$2,668.90 an ounce and the December copper contract was up four cents at US$4.47 a pound.

This report by The Canadian Press was first published Oct. 11, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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