Even with markets more volatile than usual, advisors don't recommend sitting in cash and waiting it out.DNY59/iStockPhoto / Getty Images
Investors have watched stock markets swing wildly in recent months amid a war in the Middle East that’s disrupted oil flows, fears of a tech and AI bubble and ongoing concerns about the private credit sector.
That’s all happening just as Canadians receive tax refunds. So, with a lump sum soon arriving in bank accounts, where should clients invest when the markets are so topsy-turvy?
“There’s always going to be something in the world that gives us cause for concern,” says Dan Bortolotti, portfolio manager with PWL Capital Inc. in Toronto. “Admittedly, these days it’s a little bit more acute than most other times.”
But even in the past few months, markets have risen when they were expected to fall – and vice versa.
“There is no logic,” he says. “The only thing you can do is build a long-term plan that is broadly diversified and then just stick to it all the time.”
Derek Benedet, portfolio manager with Purpose Investments Inc. in Toronto, says it’s important not to chase the latest fads with money from tax returns.
“Look at your portfolio, look at your exposures, look at using this new money coming in as a chance to rebalance,” he says.
“Never try to time the market,” he adds. “Just focus on the long term.”
Even with markets more volatile than usual, Ida Khajadourian, senior portfolio manager and senior investment advisor with Khajadourian Wealth Management at Richardson Wealth Ltd. in Toronto, says clients shouldn’t sit in cash.
“I’m not a fan of cash,” she says. “For me, in an inflationary environment, it’s basically negative returns.”
If investors are wary of deploying all their cash at once, Ms. Khajadourian recommends investing 20 per cent to 40 per cent at a time over several weeks and keeping the cash portion in T-bills or a high-interest savings account.
A few Canadian exchange-traded funds Ms. Khajadourian prefers for more conservative investors include iShares Core S&P/TSX Capped Composite Index ETF XIC-T, iShares S&P/TSX 60 Index ETF XIU-T and iShares Core MSCI Canadian Quality Dividend Index ETF XDIV-T, which is “a good way to generate some income and be invested in high-quality dividend payers.”
By focusing on companies with solid earnings and strong fundamentals, “this volatility is creating opportunities for us to keep investing in our favourite companies,” she says.
“It’s always a bit nerve-wracking, but we have to not be emotional about what’s going on. We have to be focused on our long-term objectives for our clients, and we’ll take advantage of these opportunities.”
In recent weeks, Ms. Khajadourian says she’s been adding some of the software stocks that “have been thrown out with the AI story,” putting money back into Alphabet Inc. GOOG-Q, Amazon.com Inc. AMZN-Q and Microsoft Corp. MSFT-Q while trimming energy and precious metals stocks that had run up significantly.
She’s also adding to international exposure, particularly in the global small-cap space. “There’s a lot of value in smaller names.”
Her firm uses a portfolio from a global small-cap manager, but for smaller accounts, she points to iShares Russell 2000 Growth ETF IWF-A.
Mr. Benedet says Purpose Investments is also boosting international exposure, as many Canadians probably have too much U.S. exposure after several years of strong returns.
“You’re seeing earnings growth, but you’re also seeing much better valuations [with international stocks] compared to what we’re seeing in the U.S,” he says.
It’s hard to pick top individual international names, so Mr. Benedet recommends broad ETFs or mutual funds. Some top South Korea tech stocks have been volatile, he notes, but many Japanese names are attractive with good valuations and strong earnings.
In addition, the Japanese government has implemented more business- and investor-friendly regulations and a weaker yen is making its exports more attractive, he notes.
Purpose Investments also is “overweight emerging markets for the first time in probably 10 years,” he says. “We see a tremendous amount of earnings growth, and we see good, decent valuations still.”
Most Canadians’ portfolios have a strong home bias and Mr. Benedet says investors should have 25 to 30 per cent of their portfolio in international investments excluding the U.S.
For clients getting a tax refund, “that’s a good area to start to add to that exposure.”
Many of the hot U.S. stocks are momentum trades, Mr. Benedet says.
“Momentum can work, but when it stops working, it stops working very quickly.”
Most investors should focus on balance and diversification, he adds.
“I know it’s not necessarily exciting advice, but it is the kind of advice that works.”