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The Financial Media Can Be Harmful to Your Wealth

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“Success in investing doesn’t correlate with I.Q…. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”

– Warren Buffet

As Warren Buffet and countless other investment gurus have observed, one of the most important factors for being a successful investor is the ability to control your emotions. While there are numerous analytical tools that can be used to assess the quality, value, cash flow and potential future returns of an investment, they are often trumped in decision making by an investor’s emotions, particularly greed and fear.

Fear of loss is by far the more powerful of the two emotions. In fact, behavioural economists have found in multiple studies that investors view the pain associated with losses as twice as emotionally powerful as the joy experienced from gains. When equity markets drop, investors become more and more risk averse as a result. The aversion is heightened if the drops are meaningful (5%+) and if they happen over a short time period.

The media, while an excellent source for timely details on the economy and company specific information, is also known to sensationalize stories that play on an investor’s emotions. By dramatizing a story, the news source can attain a much larger audience, meaning more clicks, views and interest. Unfortunately, these stirring stories can lead investors to become more emotional and to make bad investment decisions.

During rising markets, stories are often tilted positively to build on an investor’s greed and desire for quick wealth. During down or volatile markets, stories tend to focus on risks and negative factors that play upon investor’s fears. These fears often can lead investors to react by indiscriminately selling their portfolio holdings, regardless of that investor’s goals, needs or even whether the investment is of good quality, offers attractive value or needed income. This indiscriminate selling can result in lower long-term returns and the risk that the investors do not reach their retirement goals.

One recent example was an article on Bloomberg’s website on March 8, 2018 titled “JP Morgan Co-President Sees Possible 40% Correction in Equity Markets”. While the title was factual, it only told part of the story and in this case, the part it did not tell was far more important.

Daniel Pinto, the co-president of JPMorgan stated that within the next 2-3 years, there is likely to be a deep correction in US equity markets of 20-40%, so the headline is factual, but it is nuanced to indicate that the correction is imminent or at least likely to occur in the near-term, not in 2-3 years AND the headline uses the most extreme scenario of a 40% correction vs. the range of 20%-40%. The other element the headline does not include is Pinto’s short-term views, as JPMorgan has generally been positive on the short to medium term prospects for equity markets, i.e. JPMorgan anticipates that the market will rise further prior to a correction. For example, if Pinto sees the market going up 20% in the next two years prior to a correction and the market then drops 20%, the investor’s return is closer to 0% (including dividends earned). A near zero percent return is likely insufficient to meet most investors’ near-term goals, but that is a lot less scary than losing perhaps 40% of their current wealth.

While the headline could incite fear in investors, a more thorough reading of the facts presented in the article should instead yield some caution and reflection. The article highlights that we are in the latter stages of a bull market and due to the low volatility and strong performance of the equity market in late 2016 – early 2018, many investors’ expectations have become too high. During this later stage of a rally, investors should take a breath and reflect to see if their portfolios are in line with their target asset allocations and risk tolerance. It is also a good time for investors to meet with a financial professional to review their goals, cash flow needs, taxes, risk tolerance, time horizon and unique circumstances to create a customized and detailed financial plan and investment policy statement. Investors with formal financial plans and investment policy statements are more likely to stick to those plans and be less swayed by emotions.

Reading a full financial article, not just the headlines, is a good way to uncover useful information for investing. Coupled with a comprehensive financial plan, thoughtfully reading full articles (not just the headlines), is a proven way to control your emotions and to protect your wealth.

Lorne Zeiler
Written By:
Lorne Zeiler, MBA, CFA
VP, Wealth Advisor
lorne@tridelta.ca
416-733-3292 x225

Lorne Zeiler on BNN’s The Street – March 21, 2018

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Lorne Zeiler, VP, Portfolio Manager and Wealth Advisor, TriDelta Investment Counsel, was the guest co-host on BNN’s The Street on Wednesday, March 21st discussing the following:

Income Investing Strategies in the Current Environment

Given the expectations of rising interest rates and renewed market volatility a traditional bond or dividend focused portfolio may be incapable of generating sufficient income at low volatility needed by investors. Lorne Zeiler, Portfolio Manager, discusses how to design a stable, income producing portfolio in this environment on BNN’s the Street.
Click here to view

Keeping Calm and Profiting from Volatile Markets

When markets drop significantly in short periods investors often let emotions take over and make bad investment decisions. Lorne Zeiler, Portfolio Manager, discusses how to take emotions out of investing by designing a stable, diversified portfolio, including alternative assets, on BNN’s the Street.
Click here to view

Lorne Zeiler
Written By:
Lorne Zeiler, MBA, CFA
VP, Wealth Advisor
lorne@tridelta.ca
416-733-3292 x225

Lorne Zeiler on BNN’s Market Call, February 7, 2018

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Lorne Zeiler, VP, Portfolio Manager and Wealth Advisor, TriDelta Financial, was the guest on Market Call last night (February 7, 2018).

Below is a link to Lorne’s top picks, market commentary and past picks

Click here to view

Lorne Zeiler
Written By:
Lorne Zeiler, MBA, CFA
VP, Wealth Advisor
lorne@tridelta.ca
416-733-3292 x225

Lorne Zeiler on BNN’s ‘The Street’, Jan.12, 2018 – TriDelta Fixed Income Fund

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Lorne Zeiler, VP, Portfolio Manager and Wealth Advisor, TriDelta Investment Counsel, was the guest co-host on BNN’s The Street on Friday January 12th discussing the following:

TriDelta Fixed Income Fund Generates 6.5% Return in 2017 (vs. Index return of 2.5%)

The TriDelta Fixed Income Fund generated a 6.5% Return in 2017 (vs. 2.5% for the index). Lorne Zeiler, Portfolio Manager, discussed the benefits of active management in fixed income investing and income alternatives on BNN’s the Street this morning.
Click here to view

Lorne Zeiler
Written By:
Lorne Zeiler, MBA, CFA
VP, Wealth Advisor
lorne@tridelta.ca
416-733-3292 x225

Lorne Zeiler on BNN’s ‘The Street’, Jan.12, 2018 – TriDelta Financial’s 2018 Market Outlook

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Lorne Zeiler, VP, Portfolio Manager and Wealth Advisor, TriDelta Investment Counsel, was the guest co-host on BNN’s The Street on Friday January 12th discussing the following:

TriDelta Financial’s 2018 Market Outlook.

While Equity valuations are quite high (particularly in the United States), we still feel there is more room for the Bull market to run in the short-term, but that the best opportunities may be in Emerging Markets, Europe and Japan. Lorne Zeiler, Portfolio Manager, discusses our views this morning on BNN.
Click here to view

Lorne Zeiler
Written By:
Lorne Zeiler, MBA, CFA
VP, Wealth Advisor
lorne@tridelta.ca
416-733-3292 x225

Seven ETFs to counter a Canadian portfolio bias (from the Globe and Mail)

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Lorne Zeiler, VP, Portfolio Manager and Wealth Advisor at TriDelta Financial was interviewed by Joel Schlesinger of the Globe and Mail on how Canadian investors can use ETFs to reduce specific Canadian market risks in their portfolios. (Article printed on September 26, 2017).

In the investing world, you can have too much of a good thing. This especially applies to many Canadian investors, who often have too much home cooking in their portfolios for their own financial well being.

“Typically, Canadian equities make up two-thirds or more of investors’ equity investments and, in some cases, all of them,” says Lorne Zeiler, wealth advisor with TriDelta Investment Counsel in Toronto. He often sees this problem with the portfolios of new clients.

According to a 2015 study from Vanguard, Canadian investors have on average 60 per cent of their equity portfolios invested in Canada.

That likely means they are overconcentrated in just a handful of sectors, says Paul Taylor, chief investment officer at BMO Global Asset Management. “The reality is we here in Canada are a trees, rocks and banks-based economy and market.”

About two-thirds of the Canadian equity market, for example, is made up of companies involved in the energy, mining and financial sectors, meaning many investors probably have too much exposure to them.

That isn’t to say Canadian exposure hasn’t served investors well. The TSX Composite Index doubled in value from 1999 to 2015, for example.

But the home country bias has hurt more recently, Mr. Zeiler says. Consider in 2015, “when energy prices dropped substantially, energy stocks fell roughly 20 per cent, but the TSX as a whole was also down over 10 per cent.” Given oil’s uncertain future, this Canadian bias now appears less beneficial by the day.

What’s more is that by sticking mostly to Canada, we are missing out on a whole world of investment – given Canada’s stock market makes up only about 3 to 4 per cent of the global equity marketplace, Mr. Taylor says.

That may leave some investors asking how they can create a truly diversified portfolio.

One strategy they shouldn’t pursue is radically altering their allocation to reflect Canada’s actual share of the global markets, says portfolio manager Michael Job with Leith Wheeler Investment Counsel in Vancouver.

“I think that’s unreasonable, because it assumes people are completely agnostic to currency risk,” he says. “The reality is for most Canadians, our living expenses are predominantly in Canadian dollars.”

The more foreign content you own, the more currency risk you need to manage – and that comes at a cost, Mr. Job adds. A better option is aiming to have half the portfolio allocated to Canadian investment with the other half split between the United States and non-North American investments, he says.

Investors should first look to the U.S. market – the world’s largest – because it is the easiest to access. The United States also offers the widest variety of investments to choose from, including technology and health care – two sectors that are not well represented in Canada’s marketplace.

One way investors can find the lowest-cost, most broadly diversified access to markets beyond our borders is by using exchange-traded funds, or ETFs, Mr. Zeiler says.

“For the U.S., clients should look at ETFs that mimic the S&P 500 for broad-based exposure … or invest in specific sectors that are lacking in Canada, like technology or health care.”

Here are a few ETF picks that can help you dilute any Canadian overconcentration in your portfolio.

SPDR S&P 500 ETF: This fund tracks the performance of the S&P 500, one of the more diverse indices in the world, providing access to large companies based in the United States in a variety of sectors including tech, health care and consumer staples, most with global reach. “SPDR has one of the lowest management fees among all ETFs and provides broad exposure to the entire U.S. market,” says Mr. Zeiler.

iShares Global Healthcare Index ETF (CAD-hedged): This ETF provides diversified exposure to the health-care sector. About two-thirds of its holdings are listed in the United States, and the rest mostly consist of European listings. The “MER fee is higher at approximately 0.65 per cent, which is common with many sector- or style-focused ETFs,” Mr. Zeiler says. “For investors wanting exposure to U.S. dollars, a non-currency-hedged version of this same ETF can be purchased on the New York Stock Exchange.”

Vanguard Information Technology ETF: This New York Stock Exchange-listed fund offers low-cost access to some of the largest companies in the world, let alone the tech industry. It is a “great, single investment solution to gain exposure to the IT industry,” Mr. Zeiler says. The investment consists of more than 300 holdings, “but the top 10 make up over 50 per cent of total weight.”

PowerShares LadderRite U.S. 0-5 Year Corporate Bond Index ETF: This Canadian-listed ETF provides investors with fixed-income exposure to the U.S. corporate bond market, which is the largest in the world. Using a laddered bond strategy, it aims to reduce interest-rate risk. Mr. Zeiler notes the management expense ratio, or MER, is a reasonable 0.28 per cent, but while distribution yield exceeds 3 per cent, yield to maturity is only 2.1 per cent, “meaning many of the bonds in the portfolio are priced at a premium.”

Vanguard FTSE Emerging Markets All Cap Index ETF: This Canadian-listed ETF attempts to reflect the performance of the FTSE Emerging Markets All Cap China A Inclusion Index, providing exposure to large, mid-sized and small-cap companies based in emerging markets. Investors gain access to a diversified basket of stocks across many regions for a relatively low cost – an MER of 0.24 per cent, Mr. Zeiler says. The fund also has fairly good liquidity compared with similar offerings and has more than $600-million in assets under management.

BMO MSCI Europe High Quality Hedged to CAD Index ETF: This one offers exposure to European equities but uses a return-on-equity screen to ensure companies are of high quality while hedging back to Canadian dollars. The ETF provides investors with the opportunity to participate in the euro zone’s most successful firms spread evenly across many sectors including consumer defensive, health care and industrials, Mr. Taylor says.

iShares MSCI EAFE Index ETF (CAD-hedged): This ETF aims to track the performance of the MSCI EAFE Index, which encompasses the largest publicly traded companies in the developed markets of Europe, Australia and the Far East. Mr. Zeiler says the fund is a good way to get “broadly diversified exposure to non-North American developed markets without taking on currency risk.”

Lorne Zeiler
Contributed By:
Lorne Zeiler, MBA, CFA
VP, Wealth Advisor
lorne@tridelta.ca
416-733-3292 x225

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