TORONTO -- The markets are complicated, volatile and not for the faint of heart. It is so easy to be seduced into believing you can make a quick buck by getting in and getting out quickly. Day traders will tell you a buy and hold is a dated strategy and trying to the time the market in today's environment is the way to go.
I'm not so sure.
I'll give you an example. Once the darling of Quebec, and will be dropped from the index on Monday June 22. The company no longer meets eligibility criteria for inclusion. Bombardier shares are trading around .50 with 15 of 17 analysts that cover the stock having a hold on it, one a buy and one a sell. The analysts have a consensus 12-month price target of 61 cents per share.
As an investor do you buy, sell or hold? This is a company that isn't without it challenges. Recently the company laid off 2,500 employees, and they have shifted their focus to the corporate jet from once bring involved in everything from snowmobiles to commercial aircraft. Now with a pandemic does physical distancing create an opportunity for demand or does video conferencing reduce the need for future travel?
Before you decide to invest, take a moment to think like the pros -- pension fund managers;
- The best place to begin is with an investment policy statement. This is your road map. This can be done on your own or in conjunction with your advisor.
Regulators require every pension plan to have a formal investment policy statement, yet very few retail investors have one. This document will outline your goals, objectives, time horizon, risk tolerance, asset allocation and investment strategy. This statement changes only when a significant, life-changing event happens such as a death of a loved one, birth, changes to the tax code, a windfall or even getting out of debt.
- The next step is to be realistic about your timeline and your tolerance for risk.That, in turn, will drive your asset allocation. Pension funds have funding commitments for the next 100 years, which is certainly a different perspective for long-term investing. If you ask the average person investing for themselves what they consider to be long-term, you might hear how their stocks have performed during the past quarter.
- Asset allocation refers to the distribution of your money over cash, stocks, bonds, real estate, infrastructure and other assets. Concentration risk can be a concern, and a way to manage that risk is to limit exposure and keep investments to a maximum of five per cent in one holding. For some, even five per cent may be a stretch, depending on the size of your portfolio. It is recommended you invest no more than 5% in a single company and for that may even be too high. It may provide too much concentration risk and while could have a big gain of course you could also experience a large loss.
- Your timeline should always be longer than you think. If you are 60 you may think 20 years is reasonable; I would argue your time horizon should be 40 years because no one wants to run the risk of outliving their money. Pension funds are investing today for liabilities many years down the road.
- And finally when it comes to diversification, get out of Canada. Canada only represents roughly four per cent of the global equity market. There is simply too much opportunity outside of Canada to ignore. In fact, the CPP has a goal to allocate one-third of its investments in the fastest-growing economies by 2025 and that means exposure to emerging markets.
Back to the original question, if you think like the pros, would they be racing to buy Bombardier? Likely not.
Sadly once a giant in the industrial sector isn't going to be a staple in many pension funds any time soon.
