Investment Ideas for 2015 Part III

bear

We live in a global world so it is important to study the potential global risks to your investments. Many investors around the world have seen their currency fall in value. Countries that rely on exporting commodities, Russia, Australia and Canada to name just a few, were hit hard in 2014. The demand for commodities has been weakened on two fronts, slow world economic growth plus a strong U.S dollar. In simple terms, the strong U.S. dollar, is like going to a clearance sale with lots of products but the price keeps on going up every week.

Currency Risks

Most investors neglect to take into account currency risks within their investments. Prior to the financial crisis governments would increase spending or cut taxes to help economic growth. High government debts in most countries around the world has put pressure on Central Banks to stimulate the economy by devaluating their currency. The Fed has stopped Q.E. and there is talk of raising U.S. interest rates in 2015 which could add more pressure on other currencies.

Credit Risks

Most consumers are happy with the fall in oil prices but they pose a huge risk to their bond investments. Drilling for oil requires big capital spending which is funded by selling bonds and oil futures. Many small companies are going to go bankrupt if oil prices don’t go back up. Banks and hedge funds who bought bonds and oil futures are going to lose a bundle.

Default Risks on Foreign Bonds

Greece elections are coming up, a new government could decide to leave the Euro Zone making Greek bonds worthless. Oil producing nations like Venezuela and Russia could default on their bonds if oil prices don’t go back up.

Investment Ideas

  1. Reduce your bond exposure
  2.  Check to see if your ETFs or equity mutual funds have a currency hedge
  3. If you live outside the U.S. convert your cash into U.S. funds
  4.  Delay investing and keep some cash on the sidelines
  5.  Get defensive – a crisis in the bond markets will cause stock markets to fall just like 2008
  6.  Don’t try to a catch a falling knife, avoid oil stocks which are getting cheaper every day.
  7.  Reduce your exposure to emerging markets because they have debt in U.S. funds and a stronger U.S. dollar will increase their debt and interest costs.

bull

I suggest even if you are young, in your 20’s & 30’s, boosting your investment returns could reduce the amount that you will have to save for retirement.

I am going to say it again “money has no flag and no country it only seeks higher investment returns”! I have never traded currencies on the forex market and I am not a currency expert by any means. But last year, both the Euro & Yen fell against the U.S. dollar. The fall in oil prices will be deflationary which could lead to even more Q.E.  A bond crisis will cause money to seek a safe haven which is the U.S. dollar and U.S. investments.

Education fact: According to Investopedia “The foreign exchange market (forex market) is the largest financial market in the world. In fact, the market for currencies is several times larger than the stock market.”

Investment Ideas for 2015 Part II

 

spy-20
Part of my top down investing method is looking at the long-term chart of the country’s stock index. Since I like the U.S. market, I use the S&P 500 because it is the benchmark that U.S. mutual funds are measured against. Most market experts believe it is difficult to be successful at timing the market over the long run. Trying to sell at the market top and buy at the market bottom is impossible to time. Although, I agree over the long-term, sometime it pays to reduce some risk within your portfolio.

“Rule No. 1: Never Lose Money. Rule No. 2: Never Forget Rule No. 1.” ….Warren Buffet

The 20 year chart of the S&P 500 above illustrates three up markets and two down market trends. The current U.S. bull market of 70 straight months is the longest since World War II. I am protecting my portfolio by sector rotation into more defensive areas and increasing my cash position to take advantage of any market weakness.

In Investing Ideas for 2015 Part 1, I mentioned that I like the transportation sector and the consumer discretionary sectors which was also covered in my blog post “How to profit from falling oil prices” .  So I will illustrate my research methods on another sector Healthcare.

The health care sector has  long-term growth potential due to the aging population and investors considered it low risk. My research process is to check ETFs providers to compare their performances, fees and top ten holdings. All ETFs are not created equal, there are so many different choices. This is an example of what I found at the Spider ETF website and Blackrock I-shares.

SPDR International Health (IRY) I-Shares Healthcare (IYH)
SPDR Pharmaceuticals (XPH) I-Shares Pharmaceuticals (IHE)
SPDR Healthcare Equipment (XHE) I-Shares Medical Devices (IHI)
SPDR Health Care Services (XHS) I-Shares Health Care Provider (IHF)

At first glance you would think that most of the top ten holdings of SPDR Pharma (XPH) would also be in I-shares Pharma (IHE). I found only five companies that were in both ETFs plus they had different holding percentages. You can see from the three year chart below that both pharmaceutical ETFs have outperformed the S&P 500!!

 

heath

The chart also illustrates that more money has been moving into this defensive sector during the past year. It also confirms that I should be more defensive in my investing choices.

Further research needs to be done on comparing another defensive sector and high risk. The one year chart below  compares a consumer staples ETF (XLP) with a high yield U.S. bond ETF (JNK) and international high yield bond ETF. (IJNK)        (high yield is basically junk bonds)

junk

Another comparison that you can make would be a chart of a small cap ETF and the S&P500. Even though I like the growth potential of small caps, I am going to wait!

I am also going to wait on buying any tech ETFs because tech stocks are the most liquid and the big money players can sell them quickly if there is a market correction.

Although, I still like banks, I am worry about their exposure to the oil patch. The big unknown is which banks have large speculative bets in oil derivatives that could blow up into huge losses? I think that I need to do more research in this area. Regional banks may be a better possibility?

For my fellow Canadians, the number of Canadian ETFs are somewhat limited. To protect further declines in our dollar, I suggest ETFs that have a currency hedge built in.

What do you think? Where are you putting your investment dollars?

Next blog post: Investment Ideas for 2015 Part III – I am going to look at potential investment risks to your portfolio.

 

 

5 New Year Resolutions That I Always Keep

Although no one can go back
and make a brand new start,
any one can start from now
and make a brand new
ending!


……..Carl Bard

I have given up on New Year resolutions about my weight and my physical condition. Being a retired old fart, my financial health has become a bigger priority. I don’t want to out live my money so now I make financial resolutions instead.

Resolution #1

Every year make a net worth statement, I list all my assets and subtract all my liabilities (debts) which leaves my net worth. I then compare it to last year’s, am I richer or poorer? Keeping financial score is important to gauge your financial health. Even if you have no assets, listing your total debts can be an incentive to eliminate them.

Resolution # 2

I make a one year financial plan. I make a list of things that we may need like a house repair or a major purchase. I also make a wish list like taking a winter vacation or buying new golf clubs. I am happy that eliminating debt is no longer needed in my plan.

Resolution # 3

I make a budget, but first I check last years budget, was I on track, were there any categories that were over budget. Anything new to include in this year’s budget. (weddings, babies or medical bills) Now I am ready to include items from my financial plan into my budget.  Can I make enough income from my retirement nest egg to cover my new budget?

Resolution # 4

I  schedule to review my plan every three months to check our progress and make any necessary adjustments to our short-term goals. (like reduce some of our entertainment budget)

Resolution # 5

Improve my financial knowledge by spending more time reading financial books, financial blogs, on-line newspapers and on-line videos. The day that I think that I know it all is the day that I get into financial trouble. I could find a  money-saving tip or an investment idea that I haven’t thought of.

I now have a plan to make a much better ending of 2015 , if I succeed I will have  a little extra something to celebrate!!!

new year 2