Cautious investing is warranted right now, but please don’t make a habit of it.
Investing conservatively means sacrificing long-term gains for near-term security. In short bursts, it can make sense. The threat of a trade war is one of those situations.
We are not talking here about remaking a well-diversified portfolio – a bad move under any circumstances beyond big changes in your life or plans. Save your caution for a registered retirement savings plan or tax-free savings account contribution for this year, or other money have sitting around.
One further proviso is that you need an exit plan for your cautious money. Three thoughts:
- Transfer a little into stocks on days when stocks fall hard, say 2 per cent or more.
- Make monthly or quarterly transfers into a diversified mix of investments.
- Wait for a serious market decline of 10 to 15 per cent and up before making a move.
Here are four ideas for investors leaning to safety right now:
The Wealthsimple bond portfolio
This new offering from Wealthsimple is aimed at people who want better returns than they can get from savings accounts and are willing to accept a modest level of risk that their investment could decline in value.
The portfolio focuses on exchange-traded funds invested in government and corporate bonds that mature in the short term, which means minimal price swings compared with traditional bond funds. Roughly one-quarter of the portfolio is in high-yield bonds, which offer premium yields but more risk.
Most holdings in the bond portfolio pay income monthly, and the yield is currently projected at a net 3.7 per cent or slightly more after the management fees Wealthsimple charges. These fees start at 0.5 per cent and decline when your assets reach six figures and beyond. For comparison, the lower-risk Wealthsimple Cash account currently pays a base rate of 2 per cent.
Wealthsimple’s bond portfolio is available to clients of its managed accounts, A.K.A. robo-advisory services. You can set up an account just to use the bond portfolio. There’s no minimum investment.
Money market funds
When interest rates were higher a couple of years ago, you couldn’t go wrong with any of the investing products designed for people who want to park cash securely. A quick product overview: investment savings accounts, which are traded like mutual funds and typically offer deposit insurance; high-interest savings account ETFs, which keep their assets in big bank savings accounts with better-than-usual interest rates; and money market ETFs and mutual funds.
Today, money market funds offer the best yields of this group, with minimal risk. Holdings in money market funds include government-issued T-bills and short-term corporate borrowing. The unit price for money market ETFs and mutual funds is usually fixed, with interest paid monthly. Yields range from 3 to 3.7 per cent.
With inflation at 1.8 per cent, the real rate of return for money market funds today is not bad when you consider the low level of risk. Expect declining returns in a trade war, where interest rates are falling fast.
Pretty much all mutual fund companies offer a money market fund. A sampling of money market ETFs: The BMO Money Market ETF (ZMMK-T), the Evolve Premium Cash Management Fund (MCAD-T), the iShares Premium Money Market ETF (CMR-T) and the Purpose Cash Management Fund (MNY-T).
Utility stocks
The S&P/TSX Capped Utilities Index has a rather pathetic three-year annualized return of 1.3 per cent and, yes, that includes dividends. Nobody wanted these stocks when interest rates were high and you could get returns of 5 per cent and more without any serious risk of losing money.
Now, with interest rates lower, investors are coming back to dividend-paying utility stocks. These shares have rebounded nicely, but you can still get yields of around 4 to 5 per cent. Utilities are a defensive sector, which means there’s potential for less extreme lows when markets fall.
You can save yourself the trouble of picking utility stocks by using an ETF covering the sector. Examples include the BMO Equal Weight Utilities Index ETF (ZUT-T), the iShares S&P/TSX Capped Utilities Index ETF (XUT-T) and the Global X Canadian Utility Services High Dividend Index ETF (UTIL-T). Warning: Fees for these funds are high by ETF standards at around 0.6 per cent.
A balanced asset allocation ETF
You can get asset allocation ETFs in four different flavours – conservative, balanced, growth and all-stocks. For the investor with a long-term horizon of five to 10 years or more, a balanced fund with a 60-40 weighting of stocks and bonds makes sense.
The weighting in stocks lets you profit if the trade threat eases and the economy continues to strengthen. The bond weighting is your hedge in case the stock markets and the economy stumble. You can lose money in a balanced portfolio, but you also keep the door open to making money in stocks.
You can find asset allocation funds in the lineups from the BMO, CI, Fidelity, Franklin Templeton, Global X, iShares, TD and Vanguard ETF families.