February 12, 2018

Portfolio Update February 2018

Today, we are glad to provide you the latest update of our DIY Portfolio. As usual, our next update can be expected in about 12 weeks, in May 2018.

Meanwhile, you can have a look at previous portfolio updates here:

Somewhat surprisingly, the global markets context has not changed much in the last few months. Again, we are one trigger-happy finger away from disaster. So far, markets don’t seem to mind at all. We only saw some blemishes in the last days of January, perhaps more related to probable interest rate hikes. Are early February steep declines a hint of things to come?

In 2017, markets appeared to love Trump’s ultra-conservative economic policies despite, to say the least, his questionable style. A little more than half of America seems to approve as shown by enthusiastic applauses by Republicans in the President’s State of the Union address.

Will the upcoming Olympics be an occasion for Korean counterparts to come together or a pretext for the North to put foolish threats into action? By the way, we like all the sporting and good spirits associated to the Games a lot, but kind of hate all the commercial and political mumbo jumbo.

To some extent, all that uncertainty still leaves us a little shy about getting fulling invested. Is there a good chance we’ll change our position sooner, maybe unexpectedly, than later?

A little while back, we talked about Preparing to Take Assets Out of RRSP, we finally took action with our first step out of RRSPs in late December.

As we developed in a recent article comparing Maximizing RRSP vs Minimizing Taxes, paying some tax now is way better than a lot more later. To summarize, our strategy focuses on remaining just under the basic tax threshold. With my somewhat low income last year, withdrawing a couple thousand bucks from my RRSP still meant only paying tax under the lower bracket conditions.

Withdrawing from RRSPs doesn’t mean we are getting out of the markets as our DIY Portfolio is still going strong. It only means we are deregistering those funds and putting the TFSA label on them. In our actual situation, the TFSA regime looks better suited to remain as tax efficient as possible.

On quick side note: our online brokerage firm charges a 50$ fee on RRSP withdrawals. At 50 bucks a pop, you have to account for it. All in all, it remains beneficial in our case. We also learned an important practical fact from our recent experience: GST applies on those fees. We omitted that detail in our initial calculations but the recurring additional 2.50$ sales tax still won’t significantly affect our overall conclusions.

Once more, I’ll remind you that I am not an investment or tax professional of any kind. The intent of this blog is not to give specific investing advice. Before investing yourself, we suggest you do all necessary research and consult a licensed financial professional if need be. 

Surfing Wicked Waves but Bracing for Impact

For a long while now, stocks markets have been on a fantastic run. It sure feels amazing when you have the chance to ride these kinds of bullish waves.

Everything feels fine on top, but you have to remember those are shark infested waters. At some point, we will fall into that treacherous mix. It is not a question of if but rather of when. Our cage and harpoon will be ready when these insensible predators try to take a big bite out of our holdings.

Could stock markets’ late January (and early February) stumble be first signs of a correction? We certainly hope so as we would consider it very healthy at this point. Markets probably can’t go only up forever and sustain that horrid pace for much longer. A sensible correction (15-20%) now or soon would be much better than a damaging big bubble bursting later.

The easy part was making a ton of money riding those extraordinary waves. It may be tougher to stay calm and profit even more when turbulent times emerge.

Getting Ready to Profit from Possible Loud Market Noise

Indicators like our own Dip Factor tool are just starting to get on the rise, yet we can already smell opportunities looming (even more than what we already saw in the first weeks of February). We must prepare and be ready to acquire additional shares of solid corporations when they get on sale.

Always adopting a long-term perspective, you can identify interesting candidates in advance. As we developed in a post a while back, in our case, along with more traditional financial metrics and ratios, 20-Year Charts Make Sense to Evaluate Stock Potential efficiently. The more a real-life chart stays in line with the ideal perfect-stock graph, the better.

Using the 12-Minute Approach makes it easier to monitor and manage our DIY Portfolio. Limiting ourselves to three 12-stock lists (Canadian Prime 12, US Prime 12 and Extra 12) reduces time spend on research and analysis while providing adequate diversification.

Although we never really talked about it here, like any respectable investor, we naturally use asset allocation to balance our stock positions. To provide a solid base, we roughly try to target about 25% for Financials, 20% for Utilities and 20% for Consumer Staples. We also try to keep Consumer Discretionary and Pipelines under 10%. The rest is split between several remaining sectors limited to about 5% each. We also try to restrain any single stock from representing more than one twelfth (1/12 or 8.33%) of our overall holdings.

Our normal allocation for Cash is around 2% but it can vary depending on circumstances. For instance, because stock markets have been doing so well for a while, our liquidities are at about 8.5% now. This will provide us sufficient funds to weather an eventual storm while making more than our fair share of buying.

Patience will also be an important factor as you don’t want to pull the trigger too early and miss out on better opportunities that will eventually present themselves later on. With that in mind, we would like to buy all these great stocks when there relative Dip Factor gets into the 3.5 to 4 range. Again, these optimal entry points can be calculated without stress in advance, making the acquisition process more of a breeze.

Classic advice from long-term successful stock investors would be to ignore market noise or short-term gyrations. We think effective investors or dividend investors for that matter, don’t completely follow their own advice. It’s true they won’t worry about short-term swings in the markets, but they don’t entirely ignore it either. In practice, successful investors rather use market noise to buy their favourite stocks at attractive prices.

Recent Buys in Maintenance Mode

Before real buying opportunities arise, we had to maintain our DIY Portfolio in recent months. You will notice our Other return being negative for the first time in a long while, if not ever. This is due to the continuing fall of the US dollar versus the Canadian currency. As we said before, we are not worried at all about it and we consider a Canadian dollar worth around 80¢ US as the norm.
Canadian interest rates are already on the rise in line with Bank of Canada’s decisions. The Fed should raise US rates pretty soon to counteract inflation in a boiling economy. This should help the US dollar to climb back up once again.

The Canadian economy has been struggling a little in comparison to the US. As a result, Canadian markets have not done as well. Prices of red hot US stocks remain quite expensive, so our next acquisitions will probably come from corporations north of the border. Doing so should help rebalance our asset allocation and our relative US exposure.

Dip Factor values remaining very low meant action was still limited in our DIY Portfolio in the last 12 weeks. In fact, we only made marginal additions to a couple existing positions. Expecting an eventual fallout of the markets, our focus has particularly been on steadier corporations.

Metro (MRU)      Down 14.34% Dip Factor 3.30

Metro’s stock value fluctuated a bit as investors had to adjust to the announcement of its acquisition of Jean Coutu and its ongoing battle for retail positioning in a fierce marketplace.

We are confident the marriage of these two wonderful giant companies will help them remain competitive and successful. They should continue to provide us rock-solid results year after year.

Canadian Utilities (CU)      Down 16.12% Dip Factor 3.47

Canadian Utilities (CU) is another fairly conservative company that will get us steady performance and an ever-lasting dividend payment stream.

Being more predictable, in actual circumstances, we preferred CU to its parent corporation, Atco.

Adding to our existing position in CU also cranked up our allocation in the utilities sector, a steady defensive sector that should bode well if markets happen to break down.

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