Hey, did you catch the big increase in bond yields in recent days?
The five-year Government of Canada bond yield has moved up to 0.55 per cent from 0.4 per cent at the beginning of the year. By bond market standards, that’s pretty big. But not big enough to satisfy a reader I’ll call the rebalancing rebel.
“I know at 65+, I’m supposed to load up on bonds and fixed income and unload on equities,” he wrote. “Given the high return on equities versus nothing on bonds, how do I convince myself to cash in the high return stocks and park my money on something with next to zero returns?”
Has there ever been a less appealing time to rebalance a portfolio, a process where you sell some of your best holdings to buy more of your weakest performers? The goal is to bring holdings of stocks and bonds back to the ideal mix for your age, needs and risk tolerance. But selling stocks today to buy bonds seems like throwing money away.
In the three months to Jan. 31, the S&P/TSX Composite Index produced a total return of 12.1 per cent and the S&P 500 made 13.6 per cent in Canadian dollars. Meantime, the FTSE Canada Universe Bond Index eked out a total return of 0.3 per cent. Total returns mean the change in price of stocks or bonds plus dividends or bond interest.
So, how does the rebalancing rebel convince himself to sell a little of his stock market holdings to buy some more bonds? One inducement – okay, a small one – is that bond yields do seem to be moving higher for now. Another thought is that higher yields are available in investment grade corporate bonds. The FTSE Canada All Corporate Bond Index had a total return of 1.9 per cent for the three months to Jan. 31.
The best reason to rebalance, painful as it may seem? It’s all about protecting the great gains the stock market has made since the crash last winter from the next big downturn. There could be many more good days for stocks before this downturn happens, but there are also signs of overheating in the market. One of them is the tsunami of retail investors who are opening brokerage accounts to trade stocks.
If you started out as an investor with an intelligently thought-out portfolio divided 70 per cent in stocks and 30 per cent in bonds, then hold to that by rebalancing. Letting big stock market returns shift your portfolio to an 80-20 mix may feel good now, but you won’t like it a bit in the next stock market crash.
-- Rob Carrick, personal finance columnist
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Stocks to ponder
Canadian Imperial Bank of Commerce (CM-T) Canadian bank stocks with low valuations and big dividends have been performing particularly well over the past year, and these same features could help drive outperformance in the months ahead. CIBC is a standout here: The stock’s total return, which includes quarterly dividend payouts, has led its peers over the past full year with a gain of 3.9 per cent. David Berman explains why the stock looks like a bargain among the rebounding Canadian bank stocks.
Also see: Investors seek clues to how Canada’s big banks will use billions in excess capital
The Rundown
GameStop frenzy sparks fresh investment in stock-trading apps
The recent trading frenzy centered on GameStop Corp and other “meme” stocks is sparking a wave of investor interest in start-ups aiming to mimic the success of Robinhood Markets Inc, whose no-fee brokerage app has helped drive a trading boom. Jane Lanhee Lee of Reuters reports.
Also see: How were more than 100% of GameStop’s shares shorted?
Traders chase sky-high returns in leveraged exchange traded products
Frenzied speculation in the shares of GameStop may have subsided, but it is business as usual in a small corner of the market where traders looking to turbocharge their gains dabble in what may be some of the market’s most volatile funds. Leveraged and inverse exchange-traded products (ETPs) – which aim to magnify the moves of an underlying index or stock several times over – account for only around 1 per cent of the US$5.9-trillion universe of U.S.-listed exchange traded products, according to CFRA. Yet some of these ETPs are drawing heavy interest from both professional traders and retail investors, reports Reuters.
Central bank ‘punch bowl’ still brimming for markets
Central bank support for pandemic-hit economies looks to endure well past the recovery in output, leaving investors little option but to keep chasing a parabolic bull market until the fabled “punch bowl” is eventually removed. But just how much punch is still in that bowl - or indeed how much more is still being poured in? Mike Dolan of Reuters has this analysis.
Others (for subscribers)
The highest yielding stocks on the TSX, plus risk data
Friday’s Insider Report: Executives are buying this oversold dividend stock
Friday’s analyst upgrades and downgrades
Thursday’s analyst upgrades and downgrades
Number Cruncher: These 23 TSX blue-chip dividend stocks are less volatile than the market
Globe Advisor
Six ‘satellite’ ETF picks for an RRSP portfolio
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What’s up in the days ahead
John Heinzl returns this weekend to do some shopping for his Yield Hog portfolio.
Bond yield rise might be the real thing: World market themes for the week ahead
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Compiled by Globe Investor Staff