Martin Pelletier: Being overly bullish can add a lot of risk to your portfolio
It really feels like global equity and bond markets have been taken over by those betting on different macro outcomes, as shown by the recent selloff in the U.S. dollar, oil prices and bond yields.
We’ve noticed two dominant camps out there: one is recommending investors buy the dips, especially in the tech-heavy S&P 500, while the other is quite pessimistic about the global economic outlook and buying long-dated bonds and selling susceptible sectors such as energy, materials and consumer discretionary.
Since we don’t gamble, we are doing neither by maintaining our position that the U.S. economy is chugging along just fine, albeit with a slower pace of growth. That said, other economies like Canada’s are likely close to being in a recession, which is being masked by record levels of immigration. Most of us feel worse off than before the pandemic because cost-of-living prices remain significantly higher while our incomes just haven’t caught up.
Overall, we’ve found that permabears tend not to make any money since they fail to see opportunities when they arise. However, being overly bullish can add a lot of risk to your portfolio, especially when it’s more geared towards speculation, so you better get it right on the entry and exit — something we think is nearly impossible to do.
Take a look at the oil market and its huge monthly swings as of late. Although it has been very rewarding as an investor in this space over the past few years, it has come with a lot of price variability. As a result, it really isn’t gaining a lot of attention by advisers, but we can’t blame them for not trying to convince their clients to own a segment of the market that speculators love to short.
On the other side, while those who have stepped into the U.S. tech sector have also experienced large drawdowns, such as what we witnessed a short few weeks ago with the yen carry trade unwind, these corrections are nowhere near the same in frequency as in others such as energy. Those advisers and investors who are deploying a dip-buying strategy in this segment have been handsomely rewarded.
The problem is that if you are a conservative investor needing to live off your portfolio and you get the timing wrong in going all in on a trade, it could be quite costly to your hard-earned wealth.
We love illustrations and recently came across one showing that if you retired in 1999 with a $1-million portfolio and went all into the U.S. equity market, which was also very tech heavy at the time, while taking out $50,000 per year to live, that portfolio would be down to only $300,000 today.
If you did the same with a portfolio that was evenly split between stocks, long-term bonds, cash and gold, you would still have $1 million.
We’re not saying today is another 1999, although many areas certainly feel that way. We also know that, statistically, the odds are in your favour as a long-term investor in the world’s strongest economy. However, there is always the risk of the fear of missing out (FOMO), chasing yesterday’s returns that may not be there tomorrow.
We just prefer a risk-managed style that takes a different approach, one that is geared more towards capital preservation during market corrections, upside capture during rallies and minimizing the risk of emotion entering in the investment decision-making process. Having a diversified portfolio that reduces volatility is very helpful in achieving this.
The truth of the matter is that you never know what lies ahead, so it’s important to do a good old-fashioned gut check every once in a while to see if you are truly comfortable with adding excessive risk into your life and your investment portfolio.
If not, there can be tremendous value in doing your own thing by making an investment for a better tomorrow for yourself instead of betting on beating everyone else.
Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc., operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning. The opinions expressed are not necessarily those of Wellington-Altus.
