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Happy Anniversary! It all began a year ago last week, March 9, 2009 to be precise, when the TSX Composite first began to shake off the troubles of the credit crisis and started to lay the foundation for the market we have today.
As investors, we all feel a lot more secure now. One year ago, and even nine months ago, none of us knew for sure if the nascent rally was the start to a true rally, or if it was just a head-fake known as a bear market trap. Were better times really on the way, or was there another shoe yet to drop? Now we know. It was the real thing. So, happy anniversary investors.
This may also be an opportune time for you to zero in on what your true risk tolerance level is. You don't discover your true risk tolerance when the stock market is raging higher, or when it's devastating your account balances. Those are the times when you 'discover' your perceived risk tolerance.
For lack of a better definition, let's say that your true risk tolerance is your long-term ability to withstand volatility in income and volatility in principal.
Instead, you locate your true risk tolerance level at times like these, when you're really not sure that that market's going to go greatly higher in the near term, or greatly lower either. It's times like these that you actually get a touch nervous when the stock market rises quickly because it may not last, or when you get aggressive about buying when the stock market falls quickly and you fear the bargains won't last.
It's at times like this, not at peaks or valleys, that you can lock in the amount of portfolio risk you're willing to assume. Determine how much risk you're comfortable with right now, allocate your portfolio that way now, and stay with that allocation more or less through the peaks and the valleys. You'll thank yourself for it later, whatever happens.
And now for a quick update on my recommended asset allocation for this market, which was for minimum cash, and underweight in fixed income securities while favouring corporate over government bonds, and an overweight in equities.
That seems to be working out okay so far. Cash rates have risen slightly over the past four weeks, but the overall rise has been insubstantial, and returns remain low. We're not missing anything by being minimally weighted there.
So far this year, bonds are up 2.6%, as measured by a Canadian broad index. Canadian stocks are up by 3.02% as of last night, while the Dow Jones Industrial Average has gained exactly the same amount: 3.02%. The S&P 500 is up by 4.19% so far this year, while the Nasdaq Composite is up 5.16%.
Thus our recommendation has been correct so far in two ways: in overweighting Canadian equities to Canadian fixed income securities, and in having more in Canadian equities than U.S. equities. (The latter is because the Canadian dollar has risen 2.62% this year, so for example the Nasdaq's 5.16% return is only 2.54% in Canadian dollar terms.)
I also note that the mistake I believe many investors made in January 2010 – investing too heavily in bonds at exactly the wrong time – was exacerbated in February 2010. In January Canadian investors bought $806.5 million in bond funds; in February they stepped up their net purchases to $1.3 billion, versus only 104.5 million in Canadian equity funds.
Their forecast for interest rates must be a lot different from what mine is. Either that or they're getting back in touch with what their true risk tolerance is, and mending that error. Which do you think it is?
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