Tag Archives: equities

How Are My “Defensive” Stocks Weathering the Recent Market Dip?

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Most people invest in the stock market to make money. I invest in it very reluctantly because I am afraid to lose money. However with fixed income investments returning very low returns recently, I have put some money into individual stocks most of which I purchased in 2011 and 2012. I picked stocks based on some professional advice which are considered “defensive.” They don’t have much potential to grow but they are expected to not drop as much during a correction as the overall market. Now in fall 2014 we’re experiencing our first real market correction since my purchases so I thought it was time to check how my defensive stocks are doing during this down turn.

Why Would I Invest in Defensive Stocks Instead of a Broad Market Index?

I actually do have money invested in some “buy the entire stock market” index ETFs. Most of that money is invested through corporate defined contribution pension plans.

I have savings, too, though, which are not necessarily intended for my retirement or even for the long term. With luck, they will stay invested for more than 7 years but if our lives take any unexpected turns they may be needed before then.

This portfolio is NOT intended to produce the same gains as, say, the TSX S&P ETF XIC. By trying to reduce losses I have agreed that I will NOT get the huge positive capital gains that an index like XIC can achieve. My goal is to get a slightly better return than GICs from dividends while not expecting to get much, if any, capital gain but hopefully to also experience little if any capital loss. (Obviously, I’ll experience a large capital loss if there is a major market collapse and I sell my stocks.)

This is NOT a portfolio for someone looking to end up with the most toys before they die. It is my personal choice because I am extremely risk averse but I’m also finding GIC returns unacceptably low at this time.

Yes, I know dividend stocks capital values may plummet as interest rates rise. I will have to accept whatever yield I chose when I bought the stock as potentially my maximum lifetime yield (unless there are dividend increases.) I may not ever be able to sell my dividend stocks to recover my capital. It’s like a type of annuity, though, where I might be able to retrieve some of my capital if I give up the income stream.

Anyway, as I said at the outset, I’m just curious whether they are behaving “defensively” during this market slump or not.

A Review of Some Defensive Stocks Performance During a Market Slump

This is a partial list of some of the defensive stocks I have invested in. For those who are interested, no, it does not actually only show the ones that are faring well: the others are faring the same or better. I’m just not sure whether I would be breaking any rules if I shared the entire portfolio online, so I’m not.

This chart compares prices at the close on October 14, 2014 versus on September 3 2014 when TSX was in the 15 600 range.

Company and Symbol Price at the close on 2014 10 14 Price at the close on 2014 09 03 Percentage change
Bell BCE 47.74 45.27 up 5.5%
Bank of Nova Scotia BNS 67.22 66.30 up 1.4%
Canadian Utilities CU 38.75 39.59 down 2.1%
Enbridge ENB 48.63 55.20 down 11.9% (more than the market)
Fortis FTS 34.57 33.95 up 1.8%
KBro Linen KBL 39.76 39.55 up 0.5%

Those changes don’t mean much, though without a comparison to how the TSX is doing. So I took a look at both the TSX composite and an ETF, XIC.

Company and Symbol Price at the close
on 2014 10 14		 Price at the close
on 2014 09 03		 Percentage change
TSX 14 036.68 15 657.60 down 10.4%

If I had invested $1000 in each stock on September 3 2014, the portfolio would now be worth $5951, which is about a 0.8 % loss. (Not including dividends and distributions)

If I had invested $6000 in XIC on September 3 2014, the portfolio would now be worth $5365 which is about a 10.6% loss. (not including dividends and distributions)

The Outcome of the Defensive Portfolio

So the portfolio is doing its job of making me happy by not losing as quickly as the TSX.

And the steady stream of dividend income has been significantly higher than what I could get from investing in GICs. (Please note that I have not replaced my GIC investing with this portfolio: I have a portion in these stocks and a larger portion in GICs for security.)

Do I Recommend Defensive Stock Picking for Others?

No.

I’m not a financial planner, a financial analyst, or a financial advisor.

I’m just a taxpayer who is writing about what we do with our money. For us, this is a reasonable way to invest. For others, it may be the worst thing they could do short of trying to skydive without a parachute.

You must find your own best investing plan. You may want to talk to a real professional for ideas: Internet websites like this one are only supposed to give you glimpses into other people’s money matters from which you can glean ideas to analyze and (usually) discard as inapplicable.

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Do you have any money invested defensively? How has it withstood this mild market correction? Please share a glimpse of your strategy with a comment.

Why Do Markets at All Time Highs Mean a Crash Is Coming? Don’t Stocks Have to Go Up to Be Worthwhile?

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As soon as markets start to go up and stay up for a few months in a row, someone starts predicting that they will crash. And when the TSX and NYSE hit new “record highs” the buzz became almost deafening: Now a MAJOR market meltdown was inevitable–it was just a matter of when. But why? Why do people assume that markets reaching all time highs mean a crash is coming: if the stock market is supposed to return an 8% or higher average, doesn’t it mean it MUST set new records and fairly steadily?

Why Does Anyone Invest in the Stock Market?

Investing for Income

Some people invest in companies listed on the stock markets to get dividends and distributions. Their investment choices are driven by a need for income.

Not all companies offer dividends or distributions though. Why would people buy shares in those companies?

Investing for Capital Gains

Many other people are investing in companies’ stocks to try to win a capital gain. They want to pay $20 for a share and sell it to someone else for $40, or more. They are willing to buy shares that don’t pay anything to investors but which may be worth more in the future than they are now.

Obviously, sometimes these investors are unlucky. The perceived value of the company drops and if they sell their shares they realize a capital loss.

Shouldn’t the Stock Markets Indices, Over Time, Go Up?

If you go to a site like Yahoo Canada finance, or sign in to a brokerage website, you should be able to look at a graph of the S&P TSX Composite Index over several years. Go to https://ca.finance.yahoo.com/q/bc?s=^GSPTSE&t=my&l=on&z=l&q=l&c= and if necessary click on: Max

It should have jagged peaks up and sharp valleys down, but there should still be an overall trend in an upwards direction. Or at least there should be if you believe that investing in the stock market should yield you a capital gain, over time, if you invest a tiny bit in every company in that market index.

If you look at the last 10 years of the S&P TSX Composite, you will likely notice it spiked up to a nice point at about 14 000 in 2011 and it’s currently (in September 2014) at 15 000 and still climbing. In 2008 it also reached over 15 000. On January 1, 1985 it was under 3 000.

The overall trend from 1985 till now is up.

So why, just because we are finally trading in the 15 000 plus range, are people shouting it’s going to crash?

For people who had all of their money invested before May 2008, and who invested for capital gains not for dividends or distributions, it must seem like the party is just about to start. For years they’ve waited patiently, pocketing any useful distributions and dividends, but biding their time waiting for some big ticket capital gains.

Unless there’s some “invisible ceiling” at just over 15 000 why should anyone be panicking?

Doesn’t Couch Potato Index Investing preach that you don’t try to time the market, you just buy steadily and hang on for the ride? I’ve never read an index investing article that said there is a maximum the market is allowed to rise.

Why I Am Still Investing a Bit a Month Every Month Into the Index Funds Mirroring the Stock Markets

I’m not the usual type of investor. I’m very conservative and very risk averse. So my portfolio stands on a wide, thick platform of fixed income securities. Enough, in fact, to provide a modest retirement income if all of our other investments failed.

Most of our new money, however, is going into the equity markets.

We are still vacillating about whether to invest the majority of it into income-generating investments or into “buy the entire market” index investments.

While we are deciding, we are putting some of our new investment funds into both. It’s wishy washy but it beats having everything sitting in cash.

So every month, we put a bit more into the stock market in the form of “buy the entire market” “ultra low fee” ETFs.

And I don’t see any reason to stop doing that just because the markets are at “all time highs.” If they never pass today’s “all time high” then there is no actual capital gain ever to be made by investing in index funds. A whole branch of the investing industry is mistaken. They will all lose money and never be able to speak on CTV or CBC again.

That seems unlikely to me. Yes, there may be a market pullback or even a radical plummet. But if you believe that capital gains can be made by investing in an index-matching-style then sooner or later, the money you invested in an index should return to parity and should, ultimately, increase in value.

I don’t like the uncertainty. I don’t like wondering if I might be buying just at the time when the rug is about to be pulled and the market will tumble into a trench it will take years to climb back out of. But that’s the uncertainty I have to accept if I want to invest in index-linked products in order to (theoretically) capture some capital gains worth more per dollar invested than my fixed income investments can yield.

Wish me luck!

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Do you index or couch potato invest? Do you have faith that the S&P TSX Composite must eventually keep rising about 15 000 and in fact above 16, 17, 18, 19 and even 20 000? Or are you selling out, buying food and ammo, and building a bunker out of gold bricks? Please share your views with a comment.