If your investments are down for the year, take solace in the knowledge that they probably will recover. That’s what usually happens. The bigger question is: “Will you?”
Falling stock prices seem to precipitate a broad range of physical and psychological problems. Studies have found a strong correlation between market volatility and health. The number of hospital admissions increases; heart attacks rise. Anxiety, panic disorder and major depression increases significantly; suicides increase substantially. To take an extreme example, during the 1987 Black Monday crash when U.S. markets tumbled almost 23 percent in one day, California’s hospital admissions spiked more than 5 percent.
Perhaps every mutual fund, stock certificate and exchange-traded fund should come with the following notice: “Warning: Investing may be hazardous to your health.”
This is no joke. As my colleague Nick Maggiulli explains, “financial post-traumatic stress disorder” is a genuine threat to individuals. He says we “replay traumatic market moments in our head over and over again and they can come to define how we invest in the future.” There is a sort of “helplessness cycle” that I believe gives rise to dangerous and occasionally fatal emotional responses.
A helplessness cycle is caused by the illusion of control. It is how most people operate; that moment of realization that they lack control over many important events gives rise to fear and then panic.
Behavioral finance has provided a solution to this problem: understanding what is and isn’t in your control can go a long way toward avoiding the sorts of emotional reactions that can put people in the hospital. Perhaps a few examples of events over which you have no control will help:
-- Market moves;
-- Geopolitics;
-- Corporate profits;
-- Federal Reserve interest-rate decisions;
-- Volatility;
-- Nonfarm payrolls;
-- Inflation;
-- Whether the next “Star Wars” movie is any good;
-- Gross domestic product;
-- Brexit, Grexit, Italeave;
-- Middle East peace;
-- Home or retail Sales;
-- Who wins the NBA finals, the Super Bowl, World Series or the World Cup;
-- Presidential tweets.
And so much more. But what about the things that are within our control? We spend so much time obsessing about items on the above list and not enough on the things we can influence:
-- Developing an investment philosophy;
-- Asset allocation;
-- Turnover of financial holdings;
-- Fees, commissions, expenses and capital gains taxes;
-- Media consumed, both quantity and quality;
-- Understanding that markets go up and down;
-- Your hopes, expectations, motivations, goals;
-- Leverage;
-- What else is in your portfolio;
-- Having any sort of long-term plan and staying with it;
-- Books that you read;
-- How much risk you are willing to assume;
-- Your own behavior;
-- Your emotional reaction to events.
That last item is actually more within your control then you might imagine. First, recognizing the sorts of things that are not within your control, dispelling your own illusions, will prevent that helplessness cycle that can lead to PTSD or worse.
Second, you can engage in the sorts of exercises U.S. special forces do before missions. They go through a mental dress rehearsal, anticipating what could go right and, most importantly, what might go wrong. When a negative event occurs, they are not surprised by it and react with cool detachment.
There are lots of things you can do to protect your health from the vagaries of market turmoil. Aside from the usual medical advice -- you don’t need me to tell you what that entails -- there are steps you can take to prevent markets from making you ill.
We would all do well to learn from Greek Stoic philosopher Epictetus: “The chief task in life is simply this: to identify and separate matters so that I can say clearly to myself which are externals not under my control, and which have to do with the choices I actually control. Where then do I look for good and evil? Not to uncontrollable externals, but within myself to the choices that are my own . . .”
Learning what you cannot control, and focusing on what you can control, is a good start.
--Barry Ritholtz, Bloomberg News columnist
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Stocks to ponder
Alimentation Couche-Tard Inc. (ATD.B-T). This value stock may appear on the positive breakouts list (stocks with positive price momentum) in the future if analysts’ expectations are accurate. The stock has 13 buy recommendations with an expected one-year return of over 30 per cent. The company will have to report solid earnings in order to regain investors’ confidence and lift the share price materially higher. The company is expected to report its quarterly results in a few weeks. Quebec-based, Alimentation Couche-Tard is a leading convenience store operator with operations across the globe. As of Feb. 4, the company had 10,020 convenience stores in North America and 2,730 stores in Europe. Jennifer Dowty reports (for subscribers).
Plaza Retail REIT (PLZ.UN-T). On the surface, Plaza Retail REIT appears to have the odds stacked against it. It’s focused on bricks-and-mortar retail, which is supposedly getting trashed by e-commerce. Its properties are in smaller markets – not the big urban centres where larger REITs see the best prospects for growth. And it has no exposure to residential real estate, even as other REITs are making big bets on apartments and condos. Yet Plaza (PLZ.UN) must be doing something right. The Fredericton-based real estate investment trust has raised its distribution for 15 consecutive years – the longest track record for any REIT in Canada. (Canadian REIT held the title until it merged with Choice Properties REIT in May). What’s more, even with the recent pullback in retail REIT units, Plaza has posted a total return, from distributions and share price appreciation, of 7.8 per cent on an annualized basis over the past decade – roughly double the total return of the S&P/TSX composite index. John Heinzl reports (for subscribers).
CCL Industries Inc. (CCL.B-T). This stock appeared on the positive breakouts list (stocks with positive price momentum) last week as the share price closed in on its record closing high, which it is currently just 4 per cent away from. However, further upside in the stock price may be temporarily limited given management’s muted earnings outlook for the second quarter. The company is expected to report its second quarter earnings results in August. Earlier this month, several insiders were selling shares in the market. Toronto-based CCL Industries is an industry leader. It is the largest label company in the world with operations in 40 countries. Jennifer Dowty reports (for subscribers).
The Rundown
The surprisingly reliable timing strategy for buying TSX bank stocks
When financial firms hold investor days, investors become believers. That’s one takeaway from an analysis by National Bank Financial, which looked at the performance of bank and insurance stocks after executives walked investors through their strategies and financial targets over the course of several hours, and sometimes days. These stocks often outperformed their peers following these special events, offering a compelling trading strategy for short-term investors. But does the strategy of buying into investor days show promise beyond the financial sector? David Berman reports (for subscribers).
TSX makes remarkably broad-based rebound to record highs. Strategists believe the rally is far from over
Well look who’s back. After a long period of sluggish performance, Canada’s benchmark index has shaken off concerns about tariffs, crude oil prices, mortgage regulations and interest rates − and emerged to a new record high. The S&P/TSX composite index rallied to 16,420.95, up 104.42 points or 0.6 per cent, on Wednesday. It has passed its previous high in early January, even as major U.S. stock market indexes continue to meander below record highs touched earlier this year. The move by Canadian stocks caps a rally of more than 9 per cent from lows in February, when North American stocks were suffering some of their most harrowing declines in years. David Berman reports (for subscribers).
Cannabis-stock euphoria has returned – and short sellers are salivating like never before
Investors have been pushing marijuana shares back near their highs, with a number of stocks recovering most of what they lost during a recent correction, as the federal government neared final approval of legislation that will legalize recreational use of the drug. The enthusiasm comes despite serious questions about just how profitable these companies can become under legalization, a potential that has led to extremely high valuations in the sector. That’s led to intense interest in the stocks from short-sellers, who profit when stocks decline, not rise. IHS Markit says US$2.5-billion in cannabis stocks are being shorted as of Monday, the highest level it has recorded. David Milstead reports (for subscribers).
Still want to ride the cannabis boom? Six bets to play the green gold rush
The growing menu of cannabis stocks may be enticing for investors seeking to profit from the green gold rush, but betting on winners is not easy. Cannabis companies have been in the spotlight during the run-up to the legalization of recreational pot in Canada. With the passage of Bill C-45 in the Senate, the sale of marijuana now has the green light, although it will be fall before consumers can buy cannabis products. Risks for investors still abound in this young industry. There is uncertainty as to whether producers can meet delivery targets, or whether there could be a cannabis glut. It is unclear whether restrictions on cannabis advertising will make it difficult for the legal product to compete against the black market. Shirley Won reports.
What investors should do as the trade war escalates
What should you do during the great trade war of mid-2018? Nothing sounds about right. There are two reasons to sit tight for now. The first is that it’s impossible to know if the current flare-up between Washington and just about everyone else is going to flame into something bigger. The second is that it’s tough to spot obvious havens. Ian McGugan reports (for subscribers).
Others (for subscribers)
Thursday’s analyst upgrades and downgrades
Thursday’s Insider Report: 3 insiders are buying this bank stock
Wednesday’s analyst upgrades and downgrades
Wednesday’s Insider Report: Companies insiders are buying and selling
Others (for everyone)
Horizons launching blockchain ETF on TSX
U.S. bank investors await stress test results for capital returns
Rosenberg sees U.S. recession in 12 months; S&P 500 has peaked
Canadian stocks reach record but no one’s wearing party hats yet
Zuckerberg on brink of eclipsing Buffett with Facebook at $200
Marijuana stocks surge after Senate approval
Dow misreads economy in kicking GE to the curb
Rates traders flood dovish BoC bets as NAFTA outlook worsens
Snap is tech’s black sheep again as analysts slash expectations
Looking for another Nasdaq? Try Europe’s aerospace and defence stocks
RBC loses its luster as investors make TD Canada’s premium bank
Number Crunchers (for subscribers)
Global retailers with a lid on executive pay
Eight growing TSX stocks that aren’t in the volatile mining or energy sectors
Ask Globe Investor
Question: I have $30,000 that I want to invest in an S&P 500 index fund. For my RRSP, would you recommend VFV or VOO?
Answer: Both Vanguard funds are dirt cheap. The Canadian-listed VFV has a management expense ratio of 0.08 per cent, and the U.S.-listed VOO charges 0.04 per cent. On a $30,000 investment, that works out to $24 annually for VFV and $12 for VOO – so VOO has a slight edge on costs.
VOO also has an advantage when it comes to taxes. Because it’s a U.S.-listed ETF and you plan to hold it in your RRSP, the dividends will not be subject to U.S. withholding tax. Dividends from VFV, on the other hand, will be subject to a 15-per-cent haircut from the U.S. government – even in an RRSP.
But VOO has one big disadvantage: Because it trades in U.S. dollars, you’ll have to convert your loonies to U.S. greenbacks – at unfavourable retail exchange rates that typically add a markup of 1.5 per cent to 2 per cent. VFV trades in Canadian dollars, which means you can pay in loonies and let Vanguard handle all the currency details – presumably at much better rates than a small investor could get.
Now, if you have a large chunk of U.S. cash sitting around, currency costs won’t be a factor (except when you sell VOO and convert the proceeds back to Canadian dollars). Alternatively, you could look into a technique, called “Norbert’s gambit,” that involves buying an inter-listed stock (or a currency ETF) in Canadian dollars and selling it in U.S. dollars. The method effectively converts Canadian dollars to U.S. dollars at a much better rate than brokerages charge for a direct conversion. (You can find detailed explanations of Norbert’s gambit with a google search.)
Even if you’re paying the broker’s hefty currency conversion costs, however, VOO could still be the better choice – especially if you expect to have a long holding period. I ran a comparison of VOO’s and VFV’s projected returns, taking into account a 1.5-per-cent currency conversion hit for VOO (on both the purchase and sale) and an annual drag of about 0.3 per cent on VFV from withholding taxes and its higher MER. The comparison further assumed that the S&P 500 will return 8 per cent annually and the Canadian dollar will remain stable over the holding period.
Given these assumptions, the analysis indicated that the Canadian-listed VFV would produce a higher return for a holding period of up to about 11 years, after which the U.S.-listed VOO would come out ahead. This is because, although VOO gets dinged by the initial currency conversion, it compounds at a faster rate (because no withholding tax applies and the MER is lower) and eventually overtakes VFV.
The difference in returns – even over long periods – would still be relatively small, however. On a $30,000 initial investment, after 20 years VOO’s advantage over VFV would be less than $4,000. Given the many variables at play here, real-world returns could be very different, of course.
Bottom line: If you already have U.S. dollars or can get them cheaply, or if you’re planning to invest for a long time, consider VOO for your RRSP. Otherwise, VFV may be the better choice. Either way, you can’t really go wrong choosing one of these low-cost ETFs.
--John Heinzl
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What’s up in the days ahead
Big-cap stocks are often perceived as the market’s safest bets - but across much of the globe, small caps have been the real winners of late. Ian McGugan will have some advice on how investors can benefit.
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Compiled by Gillian Livingston