If you are a long-term buy and hold investor with a typical cash, bond and stock portfolio you might be feeling a little down right now, no pun intended. Your portfolio probably peaked a couple of years ago and has been grinding along sideways since. But fear not, for those still accumulating, this is an opportunity.
In the long run, our contributions when things are down will be more important than those made during the peaks. As we head into the fall of 2023, the truth is no one knows where the cycle of inflation fighting interest rate hikes end. Open the news at any moment and you can probably find an equal number of arguments on both sides of the bull/bear position. As investors, the good news is with a little research and dialogue with our advisors we can push past this and add new money and take advantage of the volatility.
First, some time-tested tips to adding new money to your portfolio.
- Incremental in, incremental out – avoid large bets at all costs. Even the pros with all their analysts, research reports and nimble trading desks have a hard time timing the markets. Big moves mean you accept the price point at one moment, but you might get it right, you might get it wrong. Mostly it comes down to luck. By doing all moves incrementally, you mitigate the risk.
- Have a plan, stick to the plan – your asset allocation plan is super important, it is the roadmap for your journey. Let it guide you, add new money where there is price weakness and let the winners run. Buy low, sell high at its most basic.
- Watch list wait Out – we are inundated with news, opinions and research. Not all of it is noise, some real investments gems can be found in there. But everyone needs time to assess and learn before leaping. You don’t want to trade off the latest YouTube video you viewed. Keep a watch list of the gems to manage your impulsiveness and allow time for proper consideration.
- Manage your costs – investment intermediaries add huge value and give us access to investments; they deserve to make a profit. But those costs need to be managed. Mutual funds are getting a lot of bad press, some deserved for punishingly high fees, but they are a great vehicle for incremental adds since there are no trading commissions and amounts can be small. ETFs are incredibly cost effective and great for very efficient markets like the S&P 500 and investment grade fixed income. If you’re doing some investing on your own – i.e. independent of your advisor – trade in the middle of the day where bid/ask spreads narrow or make use of limit orders.
Heading into the second half of 2023, after a historically large and swift interest rate hike of ~5%, what to do with new money? The price re-set of interest rate sensitive assets is probably mostly behind us, so you can just look to your portfolio and add to weakness, or you can start the conversation on new ideas.
Everyone is talking real estate these days. Owning your principal residence is not an investment in the purest form. Investments produce positive net cash flow, your home does not, it requires upkeep and taxes to be paid. Investing in a condo to rent out is a hot idea, but rising interest rates have changed the math on that. And it is one asset in one location, not a very diversified approach. Why not look at investing in real estate in your portfolio then? Real estate is an interest rate sensitive investment and the category got clobbered in 2022. Heading into the second half of 2023 most of these investments have stabilized but have yet to recover making for an interesting entry point.
For investors who like the ETF structure there are many to chose from, but let’s highlight three conversation starters for you and your portfolio manager. iShares XRE and BMO’s ZRE are both great ETFs to get low-cost exposure to the Canadian publicly traded real estate space. They both offer exposure to retail, multi-family and industrial sectors, with exposure to the challenged office sector limited to ~5%. The main difference is that ZRE is an equal weight strategy of approximately 4% per holding while XRE allows holdings up to 25% and tends to get concentrated in just a handful of holdings. ZRE ekes out a slightly higher yield historically, but both are worthy considerations as the Canadian market for REITs is only so big. To get exposure to REITs in telecom, data centres and self storage, look to the US market that is much larger and more diversified. If you are OK with USD exposure, iShares IYR is a good place to start your research, with over 70 holdings versus less than 25 for XRE and ZRE.
Looking at options in the private markets? If you meet Accredited Investor criteria and are comfortable with investing via Offering Memorandum (essentially a business plan for securities not regulated in public markets) than there are some great options. Investment firms with solid track records such as Trez, Avenue Living and Centurion all offer various private REITs that have performed very well through the interest rate increases. The essential difference is that these portfolios are focused on multi-family investments spanning the US and Canada. This sector has performed very well given the demand for housing and these firms are nimble enough to invest only in the most favourable markets.
Putting any new money to work requires a certain conviction and positive view on all things. Given the macro noise around China’s economic slowdown, the Fed’s stance on fighting inflation and that nothing seems to be working beyond US tech, it is understandable why some investors might be quiet with new money. With help from your portfolio manager, there are solid opportunities to be taken advantage off in late 2023.
The information provided in this blog does not constitute investment advice from ETF Capital Management. Prior to making any changes to your investments, please consult with your Q Wealth portfolio manager to make sure the strategy aligns with your investment goals and objectives.