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Investment

Beware of bright shiny objects to avoid falling off your investment plan

Published

12 months ago

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Tom Bradley is co-founder of Steadyhand Investment Management, a member of the Investment Hall of Fame and a champion of timeless investment principles.

In my last column, I talked about investors getting distracted by bright, shiny objects and falling off their investment plan. I was referring to products or trends that are making people money and perfectly fit the economic and political narrative of the day. Things such as commodity super cycles, crypto, cannabis, meme stocks, FAANG stocks and focused strategies such as dividends only, Canada only and U.S. only. Things so compelling that investors go all in, leaving behind the notion of a diversified portfolio.

Right now, the bright shiny object is not nearly as sexy as the ones I’ve listed. It’s the safe, reliable, readily available GIC, Canada’s favourite financial product.

GICs faded from view when short-term interest rates dropped near zero. An astute GIC shopper could at best find yields equalling the rate of inflation. Investors were more inclined to hold bonds and stocks, which were providing a much higher return.

That’s changed of course. GICs and money market funds have attractive yields again and are allowing Canadians to earn a return on money they’ll need in the next few years for a trip, kitchen renovation, college education or emergency fund.

So, what does the return of GICs have to do with investors deviating from their investment plan?

Well, many are also shifting money that’s earmarked for their retirement or legacy into GICs. This is a mismatch. Savings yields shouldn’t be confused with long-term investment returns.

Historically, returns from rolling GICs have lagged bond and stock portfolios, and there’s no reason to believe this will change. Stocks, which carry a risk premium to compensate for added volatility, will beat bonds over time, and bonds, which earn extra yield from taking term and credit risk, will beat secure, short-term vehicles such as GICs.

Indeed, returns expectations for bond and stock portfolios over the next 10 years look attractive.

Bond yields, which are a reliable indicator of future returns, point to a range of 4 to 6 per cent. Likewise, there’s no reason to believe stocks won’t be in their traditional range of 7 to 9 per cent. The price-to-earnings multiple on a diversified stock portfolio is now back into the mid-teens, which is well within the historical range.

People will point to the uncertain economic and sociopolitical outlook, but there are two things to remember in this regard. First, there are always uncertainties. As the expression goes, markets regularly climb a wall of worry. And second, there are positive factors in the mix, too, particularly when it comes to the benefits of innovations and the deployment of existing technologies.

Of course, there’s no way of knowing when the market surges and dips will occur, but the chart of a fully invested portfolio will move up and to the right over the next 10 to 20 years and will be taxed at a lower rate.

Investors opting for the comfort and certainty of GICs are likely to achieve a lower return and expose themselves to a different set of risks. Risks that will assuredly make the next decision a tough one. What if yields are lower when it’s time to roll the GICs? What if inflation heats up and purchasing power is eroding? And the killer, how do you get back into stocks if you need to?

I say killer because reinvesting after getting out of the market is the most difficult decision in investing. It’s loaded with emotion and dissonance. It’s hard if the market is down and the news is bad, and even harder if stock prices are higher than when you sold.

Clearly, higher rates require different strategies for parts of your financial plan. For the money being set aside for future spending or an emergency, higher money market and GIC yields are a godsend and should be taken advantage of. There’s now no excuse for leaving excess money in a chequing account earning next to nothing.

But for money that has a longer-term purpose and needs to achieve a return well in excess of inflation, no change is required. It still needs to be allocated to higher-returning, long-term assets.

 

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Investment

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

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2 days ago

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November 6, 2024

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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.

The Canadian Press. All rights reserved.

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

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3 weeks ago

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October 16, 2024

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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)

The Canadian Press. All rights reserved.

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

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4 weeks ago

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October 11, 2024

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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)

The Canadian Press. All rights reserved.

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