Portfolio Confidential

In the last two months I’ve received dozens of emails and calls from men and women around the world seeking my advice on their financial situations. They want to talk about things they might not feel comfortable discussing with their advisor or their spouse, or they might just want help finding sources of information for their family. With no judgement, jargon or sales pitch.

Today, I’ll share four of my real world confidential portfolio discussions.

We are a couple in our late 50s. We’ve worked with the same advisor for many years now, and he has always loved the energy sector (oil and gas) and has made us money over time in it. Last summer, we had about 25% of our equity exposure in energy stocks, well above the 16% weighting in the TSX, so we were over weighted. In hindsight, that was a terrible call…but what do we do now?

Don’t waste a second of your precious time regretting a past investment decision. Accept today’s reality and today’s market value: It is what it is. What to do now? Looking on the positive side, this could be an excellent time to realize some capital losses and reduce future taxes payable. From there you can rebalance your portfolio in sectors that make sense for today’s environment and your current risk tolerance. Given the most recent Financial Times outlook for the oil market (at the time of writing on May 14), you won’t be selling at the bottom. Energy is down to 13% of the TSX, but to be on the safe side I would lean to underweighting it – no more than 3-5% of your equities.

“The IEA (International Energy Agency) said the outlook for the oil market had improved, due to supply cuts and better signs for demand as lockdown measures were loosened. Oil prices have rebounded since Brent crude, the international marker, plunged to an 18-year low below $20 a barrel last month. On Thursday, Brent rose more than three per cent to above $30. The IEA said the drop in oil demand this year, although the biggest fall ever, would not be as severe as initially thought, but it warned that a resurgence of outbreaks was a risk to a “gradual-but-fragile” recovery.”

My advisor is suggesting that I invest in pooled funds. I’m skeptical: They promise to offer opportunities the average investor doesn’t have. They are everywhere. Are they that good?

Our industry certainly isn’t very customer friendly when it comes to product labels! It’s all about marketing of course. Pooled funds are similar legal structures to mutual funds – the essential difference is that they are only available to accredited investors (minimum investment amounts vary by province). Pooled funds are usually better than mutual funds in that the embedded admin fees are generally lower and MERs (management expense ratios) are charged outside of the fund so they are tax deductible for non-registered accounts.

As your advisor has suggested pooled funds this implies that you meet the criteria to make the investment and are a high net worth (HNW) investor. They may have made this recommendation so that you can have exposure to US equities without the corresponding exposure to US estate tax. US estate tax laws are a moving target in that they change every year and sometimes radically so. Due to the structure of pooled funds (and mutual funds) they are classified as Canadian corporations. When US stocks are held within a Canadian corporation, they are considered property of the corporation, not personal property, so are not subject to US estate taxes on the death of the shareholder. Depending on the prevailing tax law and your level of wealth, you would be subject to paying (possibly sizeable!) US estate tax if you were holding individual US securities at the time of death.

For non-HNW investors, or for those who are want the lowest possible costs, I would opt for an ETF (exchange-traded fund) over mutual funds or pooled funds: they have the lowest fees because they simply mirror an index.

My wife and myself are holding Cominar Reit HY 4% 02Nov./2020 in various investment accounts. Our former investment advisor purchased a total of $69,000 for our accounts at issue date and we have since transferred these along with other investments into our self-directed accounts. I have some concern that there is a possibility that in the current extremely stressed environment these bonds could be of zero value at redemption date. Should I be trying to sell off half or all of these?

This is a very specific question about one particular security. While I understand the concern, I need to point out that it is difficult to make a proper recommendation without understanding the size of your overall portfolio and your investment objectives and constraints. Having said that, I did some research and found a comprehensive BMO report (dated May 11, 2020) covering this Cominar REIT and they continue to rate it as “outperform.” The bottom line from the report:

“Cominar REIT reported Q1/20 results, which were in line with consensus. Given lingering questions around rent collections (particularly from the REIT’s enclosed mall portfolio) and the departure of CFO Heather Kirk, we take a more cautious view of Cominar as it approaches the rest of 2020 with heightened uncertainty. Management remains committed to executing on its strategic plan, but clearly the coronavirus (COVID-19 virus) has pushed the pause button on most initiatives and prompted management to withdraw guidance in late March.”

That’s hardly a strong buy recommendation, but it also doesn’t sound to me like there is a need to panic sell here unless your concern arises from a sizeable overweight in this security relative to the size of your overall portfolio. In that case you might want to realize a tax loss on all or part of your position.

I know I shouldn’t panic right now about what is happening to my investments. I was just wondering if it is a good time to be buying more with the market down? I know it might go down further but eventually it will go back up making me money, correct? Am I missing something I should be aware of before investing? I would be investing in index funds that I would not touch for over 10 years.

Yes, stock markets tend to go up over time – the average annual total return for the US market (S&P 500 index) is somewhere around 8-10%, for most rolling periods over ten years. This is why so many investors are drawn to equity markets but recent market activity shows that even diversification won’t protect against unpredictable and extreme volatility.

No one can time the market…so don’t try. Instead, consider the two things you do have control over. First, decide whether you want to commit to being a stock market investor for the long term (10 years is a long time.) Second, use a disciplined approach and invest the same amount of money on a regular basis (e.g. monthly) so that you don’t let your emotions influence your investing behaviour.

Barbara Stewart. Do you have questions about your own investment portfolio? I have recently set up The Rich Thinking® Financial Advice Hotline. This will be a win/win: you get a free 30-minute confidential Zoom chat offering an independent, unbiased perspective on your financial situation with no sales pitch! In exchange, I get to use the anonymized data that will come from these conversations to make my Rich Thinking research even better.

Email me to book your Zoom discussion: barbara@barbarastewart.ca