Weekend Reading – Playing portfolio defence and offence

Weekend Reading – Playing portfolio defence and offence

Hey Again Everyone,

Welcome to a new Weekend Reading edition, with my thoughts related to playing portfolio defence with some offence.

Before that take, some reminders:

Thanks to Rob Carrick at The Globe and Mail for mentioning my post in his recent newsletter.

Rob also shared some ways to tap your home equity to support long-term care.

I anticipate we’ll be in a long-term healthcare crisis soon enough…sadly. The signs are everywhere. 

As just one issue, the costs of elder care and long-term care are rising fast…

The costs of elder care in Canada

In a recent Weekend Reading post I shared why money management is far more than math.

This week, I shared some reflections on why we save.

Weekend Reading – Playing portfolio defence and offence

After discussing cashflows and portfolios and drawdown options with well over 100 clients at Cashflows & Portfolios over the last two years, I’ve come to the conclusion that so many successful DIY investors have the following traits and behaviours:

1. While savings rates differ, they have a plan for savings. See why we save. 
2. After savings are targeted for retirement planning, they have a purposeful, tailored plan for investing. They avoid deviating from that plan, for the most part. 
3. While saving for retirement purposes is occurring; thinking like an optimist about the long-term future, they have a pessimistic view about any near-term results. As such, they are defensive with their money, keeping some cash handy, minding their debt, and are financially literate when it comes to inflationary or other economic trends that could impact their future. They pay attention. 

On the last point, while I am not surprised by the successes earned by many of these DIY investors, I am impressed as a collective just how well they all play some portfolio defence combined with some offence. 

Thinking beyond asset allocation

My collection of passionate DIY investors here at My Own Advisor know that one of the best ways investors can manage risk is by choosing a mix of stocks, bonds, and cash based on their goals, how long they plan to invest, their financial situation, and other factors.

Essentially, successful investors intimately manage their asset mix to help them meet their goals while managing risk.

As successful investors age, and consider retirement income drawdown approaches, that risk profile changes from asset accumulation mode and forms of higher risk-taking to more modest asset preservation and sustainability. 

Whether it’s closer to a 90/10 stock/mix, a slightly lower 80/20 mix, or something even more conservative, these investors are well aware that, historically, a more bond-heavy portfolio has had smaller losses in down markets but far less upside in terms of long-term returns. 

This history lesson can be used by investors to play more portfolio defence as they age while keeping some offence intact too. Within equities, a more defensive portfolio IMO goes beyond asset allocation, to look for stocks (or ETFs to hold), with specific characteristics that can help further. 

Making a portfolio defensive

There are a few key ways to make a portfolio more defensive.

One way is own stocks (or ETFs) with lower levels of volatility or higher quality. Think of companies that have a competitive position, ideally strong financials, and could be coined “low vol”. (Lower Volatility).

A good example in Canada might be BMO’s ETF: ZLB. 

While I don’t own ZLB myself (I own many stocks within ZLB)….some successful investors I know want to avoid any individual stock selection and prefer to own lower-cost, low-vol ETFs accordingly. All good. 

Specifically:

“BMO Low Volatility Canadian Equity ETF has been designed to provide exposure to a low beta weighted portfolio of Canadian stocks. Beta measures the security’s sensitivity to market movements. The ETF utilizes a rules based methodology to build a portfolio of less market sensitive stocks from a universe of Canadian large cap stocks. The underlying portfolio is rebalanced in June and reconstituted in December.”

Source: BMO.

Beyond market-weighted ETFs, like Vanguard’s VCN and others, by owning ZLB and related low-vol ETFs you’ll find a higher mix of consumer staples, utilities, industrials, and materials stocks that may buffer your portfolio returns when broader market selloffs occur. Besides that, from the offensive point of view, many low-vol stocks offers shareholder value well beyond dividends or distributions: price appreciation. 

So, not only in down markets could such stocks or ETFs maintain their price resiliency, by holding these stocks or ETF you take advantage of some upside when the broader market sentiment reverts – including returns that may surpass a boring cap-weighted ETF.

I’m not making anything up that such successful DIY investors don’t already know.

The proof from what they’ve experienced in their own portfolios beyond banks and telcos into more consumer staples, utilities, industrials, and materials stocks is below:

Source: Portfolio Visualizer. Blue = ZLB. Red = VCN. 

This is not only a Canadian phenomenon.

U.S. financial giant Fidelity highlights a similar benefit for investors to consider:

Source: Fidelity.

Going further, for your fixed income portion, U.S. Treasury inflation-protected securities (TIPS) might help protect the value of a fixed income portfolio. Related to that, there are some new products on the market that can help too, owning some low-risk cash alternative “garage” ideas!

Are Cash-Alternative ETFs Right for You?

Keeping some portfolio offence

Historically, the same smart DIY investors know that sectors can be cyclical.

So, yes, you can keep your DIY basket of low-vol stocks or related low-vol ETFs in your portfolio but don’t forget a tilt for surprising growth when you least expect it. Case in point, this year to date. Don’t forget the upside a small tech-tilt can offer by owning some QQQ or a Canadian NASDAQ-100 equivalent. 

I’ve compared indexing favourite VTI beloved by many advisors to QQQ below:

Source: Portfolio Visualizer. Blue = QQQ. Red = VTI.

Food for thought. 

Weekend Reading – Playing portfolio defence and offence summary

In sports, a good offence can begin with a great defence.

Well, as you approach semi-retirement or retirement you might want to consider for your portfolio:

1. A tilt towards some low-vol stocks or ETFs as part of your equity allocation.
2. A small, ongoing allocation towards tech – to juice returns when tech cycles back into favour.
3. Keeping a mix of stocks and bonds and cash that focuses on meeting your income objectives while matching your tolerance for risk.
4. Keeping a bit of cash, including any cash alternative ETFs, to deliver additional income from a low-risk investment. 

More Weekend Reading…

Congrats to Joe at Retire by 40 with his 11th annual, early retirement update. Nice…

How might you spend more in retirement? Of Dollars and Data has a key idea: spend more in “good years” and plan to spend a bit less in “bad years”. This is aligned to Variable Percentage Withdrawals (VPWs) that you can read more about below.

The benefits of Variable Percentage Withdrawals (VPW)

Does Tawcan have enough invested to live off dividends soon? Probably 🙂

On Cashflows & Portfolios we shared some common portfolio mistakes to avoid. Read on for details!

I know some readers don’t subscribe to The Globe and Mail so I thought it might be interesting for some readers to see what 80-something Gordon Pape is advising for changes to his buy-and-hold portfolio. 

Related to my theme of the week: he’s adding Procter & Gamble (PG) for a more defensive tilt. 

Source: The Globe and Mail.

Deals – Playing portfolio offence with Qtrade

Thanks to my DIY investing approach, I’m very fortunate to have partnerships and deals shared my way from many companies…offering low-cost solutions and promotions quite frequently.

I enjoy passing on those saving, investing and earning opportunities to you…

Well, one such new offer is with Qtrade.

Right now, get up to $150 cashback when you invest with one of Canada’s low-cost online brokerages: Qtrade. Their cashback promotion starts now and ends later this year. 

Sign up here for that!

You can also access my link below to take advantage of the offer and learn more:

As always, there are Deals to be had on that page – always good to save, invest and earn more where you can.

Have a great long weekend!

Mark