No, I’m not asking how you’re doing (sorry, I know everything sucks right now!). I’m talking about your investments. Active managers love to tout their ability to capture all of the upside of the market while deftly avoiding the downside. We know empirically that is not the case (the SPIVA scorecard shows that more than 90% of equity funds underperform their benchmark over 10-year periods) but individual investors still buy this sales pitch hook, line, and sinker.

Global stock and bond markets are down significantly this year. Could a skilled investor have safely steered his portfolio through these choppy waters to avoid major losses? Could he have even made money? Let’s take a look at year-to-date market returns across different countries, sectors, and asset classes to see what’s up with your investments, if anything.

Stocks by region

Canadian stocks have held up fairly well compared to the rest of global markets. That’s mainly due to the performance of energy stocks, which we’ll get to later. Still, the broad Canadian stock market (represented by XIC – iShares Core S&P/TSX Capped Composite Index ETF) is down 9.67% year-to-date.

U.S. stocks had an incredible run from 2009 to 2021, which prompted many investors to change their equity allocation to only include U.S. stocks. Unfortunately, this year has not been kind to U.S. equities, and the S&P 500 (as represented by XUS – iShares Core S&P 500 Index ETF) is down 19.70% year-to-date. 

International stock returns have largely trailed Canadian and US stock returns over the past five years. This year, so far, international stocks (represented by XEF – iShares Core MSCI EAFE IMI Index ETF) are down 18.32%. 

Finally, emerging market stock returns have arguably been the weakest amongst all other equity markets. This year is not much better, as emerging markets (represented by XEM – iShares MSCI Emerging Markets Index ETF) are down 15.34% year-to-date.

Stocks by Sector

One active investing strategy involves rotating the investment portfolio in and out of different sectors. The idea being that one could correctly time the movement out of a falling sector (like technology) and into a rising sector (like energy). Let’s take a look at the year-to-date performance of different sectors and styles to see this in action:

Speaking of technology, these stocks were all the rage since at least 2019. The famous FAANG stocks led the way, but other tech stocks also emerged as the NASDAQ returned 37%, 45%, and 27% respectively over the past three years. 

But all good things must come to an end, and tech stocks have been absolutely crushed this year. The iShares NASDAQ 100 Index ETF (XQQ) is down 31.43% so far this year, which has contributed to the overall drag on the U.S. stock market. Even in Canada, Shopify briefly became the most valuable company in the country before its share price plummeted nearly 73% this year.

Canadians love investing in big banks as they are seen as safe, blue-chip, profit churning, dividend generating stocks. The iShares S&P/TSX Capped Financials Index ETF (XFN) holds 29 of Canada’s largest banks and insurance companies. It’s currently down 11.14% year-to-date, so it has underperformed the broad Canadian market by about 1.5%.

What about utilities? We all need to heat our homes and keep the lights on. The iShares S&P/TSX Capped Utilities Index ETF (XUT) holds 16 of Canada’s largest utility companies. It is currently down just 2.85% year-to-date, which is nearly 7% better than the broad Canadian stock market.

Energy stocks had a rough 2020 – remember when the price of oil briefly went negative for the first time in history? Energy stocks lost nearly 35% in 2020 before rebounding in a big way in 2021 – rising by an incredible 83%. So far this year, energy stocks have continued their strong performance with a return of 43.69%. That outperformance has started to slip, though:

It’s a reminder of the highly volatile nature of energy stocks. From June 2008 to April 2020, energy stocks were down a whopping 89.61%.

Dividends

Canadians also love their dividends. But how have dividend stocks held up in this market environment? In Canada, about the same. The iShares Canadian Select Dividend Index ETF (XDV) holds 30 of the highest yielding companies in Canada. It is down 9.22% so far this year.

iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (CDZ) holds about 94 Canadian companies that have increased dividends for at least the past five years. CDZ has performed better than the overall market, but is still down 6.93% year-to-date.

On the U.S. side of the border, iShares US Dividend Growers Index ETF (CUD) holds 118 high yielding U.S. stocks that have increased dividends for at least 20 consecutive years. CUD is down 11.23% so far this year, which is about 8.5% better than the S&P 500.

Even better, the iShares U.S. High Dividend Equity Index ETF (XHD), which holds 75 high dividend yielding U.S. stocks, is down just 3.42% on the year.

Bonds

Rising interest rates have smacked bond prices in the face, leading to double-digit losses over the past 6-12 months. 

Short-duration bonds are less sensitive to interest rate movements and held up better than aggregate bonds and long-duration bonds. 

Indeed, the iShares Core Canadian Short Term Bond Index ETF (XSB) is down just 5.02% year-to-date. XSB has a weighted average maturity of 3.27 years.

Moving up the curve we have the iShares Core Canadian Universe Bond Index ETF (XBB), which was a weighted average maturity of 10.2 years. XBB is down 13.53% so far this year.

Finally, the iShares Core Canadian Long Term Bond Index ETF (XLB), with a weighted average maturity of 22.73 years, is not surprisingly the worst performer of the bunch and is down a painful 24.10% this year.

Alternatives

Other asset classes, like REITs and gold, have long been thought of as inflation hedges and may have been considered as part of a diversified portfolio. But how have these alternatives to stocks and bonds held up this year? The results are mixed.

The iShares S&P/TSX Capped REIT Index ETF (XRE) holds 19 Canadian REITs. The fund had a banner year in 2021, returning 34.2%, but has struggled so far in 2022 and posted a negative return of 20.28%.

The iShares S&P/TSX Global Gold Index ETF (XGD) holds about 47 gold producing companies. The fund is roughly flat on the year, down 0.36% as of June 20, 2022.

Final Thoughts

One of the dangers of looking at past performance is that we fall victim to performance chasing. That’s what led people to abandon perfectly sensible globally diversified portfolios to invest solely in U.S. stocks, or to add an extra dash of technology stocks to their holdings, or to dabble in crypto and other individual stocks throughout the pandemic.

Listen, we can’t go back in time and capture past returns. All we can do is invest with future returns in mind. Do you know which regions, sectors, asset classes, or individual stocks will outperform in the future? I don’t. That’s why I hold a small slice of them all by investing in Vanguard’s All Equity ETF (VEQT).

Related: Exactly How I Invest My Money

Here are my takeaways from looking at what’s up with your investments:

1. Past performance tells us very little about expected future returns
2. Stock returns are mostly random
3. Cycling in and out of regions, sectors, and asset classes is a guessing game. Good luck predicting which investments will outperform over the next 6-12 months

Even worse is trying to time the markets in general by selling everything and moving to cash. The typical argument is that you’re going to wait until things “settle down”, but when is a market of risky assets that are priced daily truly calm and settled?

Don’t fall into the greed and fear trap:

In 2020 and 2021, this was characterized by investors plowing money into technology stocks. Now that tech stocks are getting crushed, investors are looking for the next thing. Today, that looks like energy stocks. But energy stocks are already up big (an incredible 425% from March 2020 to June 2022). Do you think your experience with energy stocks will be similar if you buy in today?

Manage your expectations. Vanguard’s VBAL posted double-digit returns in 2019, 2020, and 2021. It’s currently posting a negative double-digit return for 2022. The annual return since inception is 4.53%, which is pretty much exactly the expected return I use for a balanced portfolio in financial planning projections.

Similarly, Vanguard’s All Equity ETF (VEQT) posted double-digit returns in 2019, 2020, and 2021. It’s currently down double-digits in 2022. The annual return since inception is 10.21%, which is still much higher than the 6% expected return I use for an all-equity portfolio in financial planning projections.

What’s up with your portfolio this year?

I got a three-month head start on working from home after I quit my full-time job in December 2019. At first, I worked from a laptop at the dining room table. It wasn’t ideal, especially when our kids were sent home for online school.

We later carved out a section of the kids’ playroom and turned that into an office with two small desks, and then eventually upgraded our desks, chairs, and computers. It’s still not ideal, but it works.

We also turned a spare room in our basement into a home gym after our regular gym shut down. We have a bike, a treadmill, a bench, adjustable dumbbells, and TRX straps. We even installed some mirrors and put up a “Come With Me If You Want To Lift” decal on the wall to complete the vibe.

But, the gym is located right below our sunken living room and so I can’t lift my arms over my head without hitting the seven foot ceiling. Again, not ideal.

Like many people who’ve spent more time at home over the past two years, we have an ever increasing list of annoyances about our current living arrangements. That, plus our kids graduating out of their current schools next year, got us thinking about making a change.

We started talking to a local home builder that builds in a nearby community that we like. They have a beautiful floor plan with a custom office and gym that really suits our style and taste. After some back-and-forth we signed a purchase agreement last month. Looks like we’ll be moving in about 10 months.

Now, I know what you’re thinking. Why would you want to make a big move in this economy? 

Buying a home is as much a lifestyle decision as it is a financial decision. Our current house served its purpose for the last 12 years while we raised a young family. Now we’re in a much different place with different needs. From a lifestyle perspective, we need to make a change.

Financially, we need to start with a reasonable budget for the house and determine how we’re going to fund it. How much are we going to put down, and what will our new mortgage payment be? Can we handle the payments if interest rates rise above 5% or 6%? 

We had our financing approved specifically so we don’t have to sell our current house before we move into the new one. But what if we can’t sell our house, or the real estate market drops by 10-20% (or more)? Do we take the price hit and sell, or do we rent out the house for 1-2 years and wait for prices to recover.

The new house comes with a draw schedule for deposits. We’re using a portion of our own funds, a portion of existing home equity, and a portion from a new draw mortgage.

We decided to use the funds in our TFSAs rather than withdrawing more from our business. Mercifully, we transferred our TFSAs from an all-equity portfolio into an EQ Bank high interest TFSA in January. We’ll tap into those funds first for the initial draws before we dip into the line of credit and new mortgage.

We still have more than $650,000 in retirement savings invested across our RRSPs, a LIRA, and our corporate investing account (that number was much higher six months ago), so we’re not at all jeopardizing our retirement plans.

Our new mortgage payment won’t cut into our travel budget or stop us from saving more for retirement (you better believe we’ll fill up our TFSAs again).

While we’re excited about this new transition, we’re also nervous about interest rates and inflation, stock markets, and real estate prices. But I also remind myself that we have a financial plan, and this transition fits within our plan and still allows us to live the life we want to live (including raising my arms over my head in the gym). 

Besides, buying a home is a transaction typically measured over 10-25 years. It’s not reasonable to expect the economy to be perfectly sound throughout that time. Interest rates will move up and down. We will experience a recession or two. House prices will rise and fall.

We can’t time that with any precision, so we make the best decision we can (both lifestyle and financial) and move forward.

I’ll be sure to share more about our home building experience and my thoughts on down payments and mortgage terms and everything else housing related as we get further into the process.

This Week’s Recap:

Last week I told you to stop checking your portfolio and I think that’s good advice to follow for the foreseeable future.

My commentary is featured in this article on why young investors shouldn’t focus solely on dividend stocks.

From the archives: Addressing major gaps in your retirement plan.

Promo of the Week:

I used to meticulously study the rewards credit card market looking for the best card to use for groceries, gas, dining, travel, etc.

The golden age of credit card rewards are long behind us, I think, and so now I focus on having one core Visa and MasterCard, which are widely accepted everywhere, and then I also hold a suite of American Express cards for their much richer rewards.

The Amex Cobalt card is my favourite. My wife and I each hold one and aim to spend $500 each on groceries with the Cobalt card every month. The Cobalt card pays 5x points on groceries. Those points can be converted to Aeroplan miles, which I value at 2 cents per mile when redeemed for flight rewards.

$12,000 spent on groceries each year gives us 60,000 Membership Rewards points. We transfer those to Aeroplan (1:1, so 60,000 Aeroplan miles). 60,000 Aeroplan miles are worth $1,200 in flight rewards. So we’re technically getting a 10% return on our grocery spending. No brainer.

In the first year that you hold the Cobalt card, you’ll get 2,500 bonus points for every month you spend $500 (up to 30,000 points in a year). So, if you follow our spending pattern, you’d earn 30,000 points for your regular spending, plus 30,000 bonus points in the first year. Not bad!

Sign up for the Amex Cobalt here.

Weekend Reading:

A couple of good reads from Dimensional. First, is there a light at the end of the inflation tunnel?

Next, a look at market returns through a century of recessions.

Ben Felix explains why dividends are irrelevant as a predictor of differences in expected returns:

A nice piece by Michael James On Money who explains what you need to know before investing in all-in-one ETFs.

A question I get from time-to-time: Should you borrow to invest with the Smith Manoeuvre? I suggest doing a risk assessment that includes the possibility of interest rates rising, stock markets falling, you losing your job, and changes to rules and regulations.

I loved this article by Adam Collins on why perfectionism ruins portfolios.

Justin Bender reviews the pros and cons of two of the most boring portfolio assets – Bond ETFs and GIC Ladders:

A shocking CBC Go Public report showed that Canada’s big banks are more likely to upsell racialized, Indigenous customers.

Finally, a look at why more retirees are choosing to go back to work.

Have a great weekend, everyone!

We’re nearly halfway through 2022 and the year has not been kind to investors, to say the least. Global stock markets are suffering their worst prolonged losses in recent memory. The S&P 500 is down about 18.5%, international stocks are down about 17%, and emerging market stocks are down about 15%. Domestic stocks have fared better, but the broad Canadian market is still down about 4% this year.

Meanwhile, bonds have not been a safe haven as rising interest rates pushed bond prices down. A broad Canadian bond index is down almost 13% this year, while short-term bonds are also down about 5.5%.

What’s an investor to do?

For starters, stop checking your portfolio so often. Investors who focus too much on short-term performance tend to react too negatively to recent losses, at the expense of long-term benefits. This phenomenon is known as myopic loss aversion:

“A large-scale field experiment has shown that individuals who receive information about investment performance too frequently tend to underinvest in riskier assets, losing out on the potential for better long-term gains (Larson et al., 2016).”

Loss aversion is a cognitive bias – the idea that a loss is psychologically more painful than the pleasure of an equivalent gain.

Think of the your portfolio returns over the past three years (2019-2021). It felt good to see your investments increase by double-digits. Here are the returns for Vanguard’s Balanced ETF (VBAL) during that time:

• 2019 – 14.91%
• 2020 – 10.24%
• 2021 – 10.27%

Fast forward to 2022 and VBAL is down 10% on the year. Loss aversion tells us the pain of these losses is felt twice as powerfully as the pleasure of the previous years’ gains.

With myopic loss aversion, we focus too narrowly on specific investments without taking into account the bigger picture. You’ve experienced this if you’ve ever checked your portfolio a short-time after a recent purchase and cursed your luck if the investment is down.

Professor John List was a recent guest on the Rational Reminder podcast and he co-authored a paper on myopic loss aversion. The paper found that, “professional traders who receive infrequent price information invest 33% more in risky assets, yielding profits that are 53% higher, compared to traders who receive frequent price information.”

When asked how often investors should check their portfolio, List said, “as rarely as possible”:

“I would say once every three, six months is fine. But the reason why I don’t want you to look at your portfolio is, because when you do and you see losses, even though they’re paper losses. You say, “My gosh, that hurts.” And you’re more likely to move your portfolio out of risky assets and into less risky assets. And as we all know, just look at the data. The data over long periods of time, that’s the equity premium puzzle, is that you get much higher returns, if you’re willing to bear some of that risk. Now, if you look at your account a lot and you have myopic loss of version, you’ll be much less likely to bear that risk. So, you’ll move out and you’ll be in inferior investments.”

This applies to both novice and experience investors. I coach clients regularly on the benefits of sticking to their investment strategy and ignoring short-term market fluctuations. But it’s hard when the daily news headlines are screaming in your face about how bad the market is doing and why it’s only going to get worse.

My worst moment was during the March 2020 crash. I had just quit my job three months before, and my investments were down 34% in a short period of time. It was a rough time when even I was questioning what to do. It didn’t help that I had no RRSP or TFSA contribution room – so I couldn’t even “buy the dip” to make myself feel better.

Related: Exactly How I Invest My Own Money

What did I do? I stopped checking my portfolio. I had no reason to log-in anyway, since I wasn’t making regular contributions. I reminded myself that my investments were long-term in nature, and that markets go up most of the time. Periodic declines are the price of admission for risky assets like stocks.

For investors in the accumulation stage, I’d argue this market decline is a blessing in that the contributions you make today have a higher expected return than contributions you made 6-12 months ago. Take advantage of this opportunity to pick up more shares at today’s depressed prices.

For investors closing in on retirement, now is the time to prepare your retirement income plan, which should include having 1-3 years’ worth of spending in safe assets like cash (high interest savings) or short-term GICs. Give yourself a safe cash buffer so you don’t need to sell investments at a loss. You can even build this cash buffer with new contributions, rather than selling off investments. Retirement can be 30+ years in length, so you still need a reasonable exposure to stocks and bonds for the long-term.

Investors already in retirement may be experiencing the most stress. That’s because they’re already in withdrawal mode and feeling the sting of portfolio losses. Nevertheless, it’s a great time to check in on your financial plan and zoom out to see the big picture. 

Look at your buckets of income. You may have guaranteed income from a workplace pension and/or government benefits. Maybe some rental income or earnings from a part-time job. Do you have a cash reserve to top-up your income, or are you relying on portfolio withdrawals? Can you spread out your portfolio withdrawals or take them later in the year?

Are you withdrawing solely from an RRSP or RRIF, while leaving your TFSA intact? Consider pausing your TFSA contributions or taking a small withdrawal so you don’t have to dip further into your RRSP/RRIF.

Do you have a planned one-time expense that can be pushed down the road to 2023 or 2024? This could include a vehicle replacement or home renovation.

The point is, no matter what age and stage you’re at there is likely an obvious solution or at least several steps you can take to stop obsessing over your investment portfolio and its short-term performance.

Investors with a sensible plan that takes into account their short and long-term goals shouldn’t worry about their investments. That’s because they should already be invested in a risk appropriate portfolio. If that portfolio was sensible in 2021, it’s still sensible today.

Do yourself a favour this week and stop checking your portfolio. Your mental health deserves a break. Take comfort in the fact that markets do go up over the long-term. Better days are ahead.