Should investors take action?
Status quo
a viable strategy
Now that
the world has had a chance to digest last week’s horrific attack on New York
and Washington, many have read opinions on the economic/financial impact of the
attacks. While many have expressed concern over the impact of their portfolios,
not everybody is taking action by making changes to their portfolios. Others
are ready to take action to protect what they’ve got, but are unsure of how to
set up their portfolio’s defense strategy. I hope what follows provides a bit
of insight.
Stock
markets and uncertainty are like oil and vinegar – they don’t mix. Picture
yourself driving down a road. All of a sudden, a dense fog appears preventing
you from seeing beyond your own hood. What do you do? In all likelihood, you
would probably slow down substantially or even come to a complete stop since
you can’t see what lies in the road ahead. That’s exactly what’s happening in
stock markets all over the globe. Applying the breaks to your car is analogous
to selling pressure on the stock market. Investors are opting to “pull over”
until the future gets a little clearer.
The most
significant factor right now is the lack of clarity on exactly who will be
involved in the U.S. military strike. It seems fairly obvious that Afghanistan
and Iraq may be included, but we just know what other nations will be involved.
The markets must first know the parties involved in this “war on terrorism”
before it can even guess at what the future holds.
As I write
this, it’s also evident that U.S. markets are extraordinarily volatile today,
September 21, 2001. Aside from the uncertainty facing the market, many futures
and option contracts are expiring today, putting even more “uncertain money”
into this nutty market.
For those
already holding a portfolio of investments, there are a couple of moves that
may bring some much-needed stability. The safest way to go is to simply hold
more cash. For mutual fund investors, that means having a higher than normal
weighting in money market funds. Money market funds, GICs, and other similar
instruments will shelter investors from market volatility.
A class of
assets known as “hard assets” has historically been a good hedge and diversifier
against traditional equity and bond investments. Hard assets include things
like real estate, gold, energy, and other natural resources and precious
metals. However, gold appears to be the best spot among hard assets at this
time. Real estate is getting beat up since some fear other skyscrapers may be
targets of future terrorist attacks. Non-energy natural resources are suffering
from delayed air travel time and clogged border crossings. Slower travel will
hamper exports – something upon which the Canadian natural resource industry
depends. Energy may be a decent move but its prospects are uncertain. While
conflict with middle-east nations typically pushes up oil prices there are two
forces working against that typical behaviour. First, a slow economy equates to
a likely fall in demand for oil. Second, OPEC has vowed to do everything in its
power to (raise production and) prevent an oil shortage. Those two factors
likely point to relatively flat oil prices. That leaves gold and other precious
metals.
Investors
can buy actual gold bars, but you can’t put that in your RRSP. In the world of
mutual funds, there are many choices. My top picks, in no particular order, are
Mackenzie Universal Precious Metals (http://stocks.myto.com/mutualfund/FundList.asp?MasterKey=152&FundKey=14109),
Royal Precious Metals (http://stocks.myto.com/mutualfund/FundList.asp?MasterKey=186&FundKey=13335),
and TD Precious Metals (http://stocks.myto.com/mutualfund/FundList.asp?MasterKey=184&FundKey=13767).
For those thrifty investors who are comfortable buying stocks and prefer a more
passive approach (i.e. indexing), Barclays offers an exchange-traded fund
called iGold (http://www.iunits.com/english/iunitsfunds/fundprofiles/igold/holdings.cfm),
which trades on the Toronto Stock Exchange under the symbol XGD and tracks the
S&P/TSE Gold and Silver Index.
No matter
what your method of defense, don’t go overboard. I think moving some money into
defensive assets is a reasonable move, but keep it within limits. For instance,
in a memo to Sterling Mutuals Inc.’s financial advisors, I recommended that no
more than 10 per cent or so of portfolios be put in money market funds. I also
recommended that no more than 20 to 25 per cent of one’s stock exposure be put
into gold and other hard assets.
As
mentioned in last week’s column, those investing new money may do themselves a
favour by averaging in over a period of twelve to twenty-four months, and
speeding up that pace as opportunities arise. For more aggressive investors,
investing up to 20 per cent of the new money is a good starting point in an
attempt to be opportunistic with a small chunk without taking huge risks.
What some
may define as lazy, I say is a viable strategy. Investors who make absolutely
no changes to their investment portfolios as a result of what I think will be a
short-term crisis, should be just fine as time passes. Trying to time a market
that can’t decide what’s going to happen is like “flooring it” in the middle of
that dense fog. Think about it. One day, energy is up, and then the next it’s
down. One day insurance companies are down sharply, and then they rebound the
next day. Decisive action should only be taken when information is more
certain. Currently, there simply is no certain information, so sitting tight is
a good move.
I don’t
have clients. Well, that’s not entirely true. I manage accounts for my family
and a few friends. I have not made any changes to any of my own accounts or
those of any family members since the attacks occurred last Tuesday. Part of my
personal portfolio was invested in a gold fund, but that was prior to the
terrorist attacks. So, I’m definitely taking my own medicine.
While North
America has never quite experienced anything quite like the 9-11 terrorist
attack, it’s quite evident that we have been through very long and difficult
crises in the past. In the end, we emerge stronger – both on a personal and
business level. Uncertainty tends to make people overreact to situations and
the stock market is no exception. Once the U.S. military strike begins, we’ll
know who is involved and have better clarity on the situation. While all
indications are that this battle won’t be quick, greater clarity should have
somewhat of a calming effect on financial markets.
Money
managers and economists who have commented during this past week agree. Since
this attack has sped up the recession many thought was inevitable, it’s also
expected that the recovery will be more robust than original estimates. Staying
calm and patient should eventually bring with it rewards that typically follow
world crises.
Dan Hallett, B.Comm.,
CFP is Senior Investment Analyst with Sterling Mutuals Inc. He can be reached
at dhallett@sterlingmutuals.com Sterling Mutuals Inc. is registered as a
mutual fund dealer in Ontario, British Columbia, and Manitoba.