Oh 2020, what hath thou wrought? As January opened, a British prince shockingly informed his family he was leaving them via Insta. At the time, that was drama. Yet by March, a global pandemic: closed schools, shuttered businesses and international borders slammed shut. Suddenly we learned what drama really is.
The stock market does not respond well to uncertainty. Yet amid the economic and social calamity, the S&P 500 is actually up this year. For that, you can thank the big guns of tech. According to UBS Global Wealth Management, the five largest stocks– Facebook, Apple, Amazon, Microsoft, and Alphabet – have risen some 37 per cent so far this year. The rest of the market is actually down nearly 5 per cent.
For many investors, a stable, predictable and consistent rate of return sound pretty darn good. How can we a boring, yet still lucrative, investment portfolio? Here are a few ideas to get you started whether you are a DIY-er or work with a financial advisor.
Low (or no) fee index exchange-traded funds mirror a basket of stocks, such as the S&P 500 or the TSX 60. Simply buying an S&P 500 index fund would give an investor ample exposure to the ‘big five’ named above, as together they comprise more than 22% of the index. To mitigate the fluctuations that come with straight-up equities, many investors divvy their portfolio into a mix of bond index funds or even precious metals ETFs.
In 2016, professor and author Harold Pollack wrote in The Atlantic, “The truth is that the same boring index funds that made sense last month, last year, and five years ago still make sense today…. Unfortunately, there’s one huge problem associated with this valuable message: No one would be excited to watch a business-news show or to buy a financial magazine that continually reminded them to simply invest in low-fee index funds.”
Cyber security is a hot sector and the prices of these companies’ stocks reflect it. However, even the most in-demand cyber security CEO still needs his trash picked up every week – so don’t be too hasty in overlooking boring services such as waste management.
Lockdown or not, people still need power, heat and water. They still use digital devices, credit cards and internet access. Looking for value in these less ‘sexy’ yet essential sectors can sometimes provide better opportunities than chasing the stocks getting all the buzz in the media.
Ye olde dividend investing strategy has fallen out of favour in recent years, thanks to the dominance of technology companies that prefer to invest their profits in funding growth rather than doling them out to shareholders. Yet if the market moves into a slower phase, those dividend payouts every quarter from cash-rich companies might look awfully attractive again.
Ultimately, what Harold Pollack wrote in 2016 is even more relevant in 2020, “People don’t need confident predictions on which stocks to buy or what will happen to the stock market… they need advice about how to face real financial challenges.” Positioning your portfolio to meet those challenges is a good start.