Portfolio Confidential

Here are three real world confidential portfolio discussions.

Q: My husband is a former pilot and he has Air Canada stock worth approximately $250,000 ($500,000 pre-pandemic). Obviously we are deeply concerned about the future of air travel. I wish we knew what was going to happen over the next five or ten years so that we could make an intelligent decision about what to do with the shares. What advice can you offer?

A: If Air Canada stock was trading above $50 in early January of this year, hit a low of $12 in March, and was at $18 at the end of August. Depending on how you look at it, the stock is either down over 60% or up about 50%! If air travel returns to normal (say by 2023 or so) the stock probably goes much higher, but if travel doesn’t return to normal the stock will not go up, and the company could even go bankrupt.

One thing to remember is that having information – even 100% accurate information – about the future is less useful than you might think. Pretend there was a time machine and someone told you on Aug 31 2019 what the world looked like a year later? “There will be a global pandemic from a disease you’ve never heard of, almost 190,000 dead in the US alone, the economy will have contracted by the most in history in Q2, and there is no vaccine or cure yet.” Any reasonable person would have not merely sold their entire portfolio, they would have likely shorted the market. But even with that perfect foresight, the S&P500 is actually up about 21% in the last 12 months!

I don’t know the size of your overall investment portfolio and that is relevant. Another point I’ll make is that your husband likely has an Air Canada pension so he has company risk there as well. I would pare back your weighting in AC shares to 5 percent or less of your overall portfolio. This isn’t because I have an inkling about the future of travel, this is simply prudent portfolio management. If the shares are held in a taxable account you may want to trigger your sell transactions over two tax years (2020/2021) depending on your need for realizing capital losses in each of the years.

Q: I have loved the run up in tech stocks but now I’m worried that this sector weighting is too high in my portfolio. What do you consider to be a “normal” weighting for tech in today’s environment?

A: It’s been quite the ride for Amazon, Alphabet, Apple, Microsoft and Facebook! As pointed out in this Financial Times article from August 19: “…the five largest stocks in the S&P 500 together account for a quarter of the rally since the crescendo of selling in late March. The quintet now represents more than a fifth of the index, the biggest weighting for the top five since at least 1980.”

My husband is Duncan Stewart, Director of Research for Tech, Media and Telecom for Deloitte Canada…and he is also a former technology fund manager. I passed your question along to him.

“In 1993, I started work at a pension fund manager, and I pitched them on the idea of creating a special tech-only fund for clients who wanted to supercharge their portfolios by increasing their exposure to tech. My elevator pitch line was “Technology is the new asset class.”

Back then, nobody knew if tech stocks would go up or down the next day, month or year. But everyone agreed that tech would be a bigger percentage weighting of the market 10, 20 or 30 years in the future: it was not just an asset class, it was a growing asset class. Plus, it was an uncorrelated asset class – other asset classes went up or down with interest rates (bonds), economic growth (stocks) or risk of inflation (gold) but tech seemed to dance to the beat of its own drum.

In 1993, tech was five per cent of the S&P 500. It is about 28% today, and if you ignore the dotcom bubble its growth has actually been steady over the last almost-three decades, the weighting in the index rising about 0.85 percentage points per year. Globally, tech is 22% of the Morgan Stanley World Index (MSWI.)

Nobody knows if 28% is the “right number” and sustainable: of course that weighting could drop tomorrow! But we do know two things. First, the sector is still uncorrelated – here we are in the middle of the worst one-quarter economic contraction in history, and tech is up 15% in the last six months while the broader market is flat. Second, almost everyone agrees that over the next decade, both consumers and enterprises are yet again going to use tech more than they did in the past, or even than they are today. It still looks like a growing asset class.”

Following on Duncan’s comments, my advice would be to look at your overall equity portfolio (funds, ETFs and individual stocks) and calculate your tech weighting. Based on the S&P500 and MSWI weighting, it looks like 20-30% is a neutral weighting. Valuations are certainly not cheap, but if you are only at 10-15%, you are probably underweight this important asset class.

If that is the case, you can revamp your entire portfolio…but that’s a lot of work! Or you can do what I do, and boost your tech weighting by buying the QQQ ETFs. They are easy to buy and sell, have minimal fees, and are an easy way to gain exposure without having to pick a specific stock or fund.

Q: My daughter wants to be an investment advisor. I’ve saved over C$200,000 to fund her MBA tuition and residence costs – she applied to various graduate schools in the US and has been accepted already for fall 2021. I want her to go to a reputable school with good networking opportunities but now that most US schools are moving to virtual classes, does this plan still make sense?

A: Scott Galloway, Professor of Marketing at NYU Stern recently did an interview with PBS on this topic: “And with the experience so dramatically decreased or disabled, if you will, a lot of parents are saying, do I really want to pay $58,000, $68,000 a year for a series of Zoom classes?”

What will 2021 look like? Will the US-Canada border be open? Will we have a vaccine, and what will happen to the on-campus experience? Maybe they will move to a hybrid (part virtual/part in class) model.

What might make more sense for her is to start the CFA program this year. The CFA (Chartered Financial Analyst) designation is the gold standard accreditation in the global investment community. The program is entirely self-study and exams are online. Plus, it’s much cheaper than MBA tuition: only about C$5,000 per year for three years.

If she enjoys the first year maybe she won’t want to do a US MBA anymore. If the US school experience goes back to normal, there might be some pricing pressure and tuition and/or rent might be lower. If you don’t end up needing most of that $200K you could invest it either for her, or for yourself.

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.