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Friday, July 23, 2021

Top five investor worries and 10 ways to solve them - Financial Post

Peter Hodson: Stock-pick your fears away — there is a trade you can make if your anxieties turn out to be justified

Author of the article:

Peter Hodson
Worry only causes investors to focus too much on one thing, often at the risk of missing the big picture.
Worry only causes investors to focus too much on one thing, often at the risk of missing the big picture. Photo by Brendan McDermid/Reuters files

Investors, as a rule, are a worrying bunch. Most investors expect the worst and many believe the stock market is little more than an outright gamble. We’ve tried our best over the years to convince you it is not. But people still buy 1.5 per cent Guaranteed Investment Certificates.

Yes, the market carries risks. But worrying does not accomplish anything. One can invest or not. Worry only causes investors to focus too much on one thing, often at the risk of missing the big picture.

So, considering it is mid-summer and you really should be relaxing more, let’s take a look at five investor worries these days, and 10 solutions — specific stocks that you can buy or sell to address the particular worry you may be having.

1. Inflation

This was the big market concern in February and again in May. Some investors rotated their whole portfolios around because of it. There were giant debates, still ongoing, on whether inflation was “transitory” or not. Recent events, such as lumber dropping 67 per cent from its peak, have reduced inflation fears a bit, but we know lots of investors who would rank it as their number one fear right now.

If you are one of them, you might want to buy a gold stock or two, such as Agnico Eagle Mines (AEM). Gold doesn’t always surge during inflationary periods, but it does on occasion and, at minimum, it tends to decline less than other sectors when inflation ticks up. On the sell side, if inflation keeps you up at night, you might want to sell a stock such as Keyera Inc. (KEY). We have nothing against the natural gas company, but inflation is just not good for regulated industries.

2. Higher interest rates

The worry of higher interest rates goes hand-in-hand with the worry about inflation, because central banks often fight inflation by raising rates. But you might want to time your stress events: Higher rates will often lag inflation and higher rates can at times stop inflation. A bit of inflation can be good for some companies.

Higher rates can also be good for investors and companies sitting on cash. But much higher interest rates simply makes the stock market less attractive. Suppose, for example, that GICs paid 11 per cent interest, which they have done in the past. With a guaranteed 11 per cent, how willing would you be to invest in a volatile stock market? So, if this is your main worry, you may want to lighten up on stable low-growth dividend stocks, such as BCE. Riskier dividend stocks will of course be even less attractive. But higher interest rates can actually be good for some sectors. Insurance is one of them. It might be time to look at a company such as Sun Life Financial (SLF), whose earnings are more likely than not to improve when rates rise.

3. COVID-19

Of course, we are all used to worrying about COVID by now. But the variants are keeping the stress level high for investors, as are the anti-vaxxers. COVID worries were blamed for Monday’s quick market drop. If this is a worry, one only really needs to look at stocks that did well in the initial COVID mayhem. A stock like Docusign (DOCU) did very well last year and hit new highs this week with renewed worries. Travel stocks such as Carnival (CCL) are obviously ones to avoid.

4. Market valuations

Other than inflation, this is perhaps the worry most discussed amongst investors these days. “Markets are at record highs,” they moan, and “the price/earnings ratio has to fall.” Maybe. Maybe not. The buyers of stocks these days don’t seem that concerned.

Sure, many large companies have expensive valuations. But their growth is high and fast earnings growth has a way of quickly lowering the P/E ratio by boosting the denominator (earnings). If market valuations are a worry, maybe look to buy something like Verizon (VZ) at 10-times earnings, rather than something like Snowflake (SNOW) at 50-times sales. Sure, the latter is growing dramatically faster than the former, but if investors start worrying about market multiples the expensive stocks are likely to be far more vulnerable.

  1. You can make money on stocks by treating them as if you were actually buying a house, says Peter Hodson.

    Five reasons investors should treat stocks as if they were buying a house

  2. Some stocks are very expensive but worth it. Conversely, some companies are very expensive and destined for a sharp fall if the market breaks. How do you know the difference?

    Peter Hodson: These are the stocks you should hold on to, even if the broader market stumbles

  3. None

    Five summertime stock picks to set and forget so you can enjoy some time off

  4. Companies such as Nikola Corp., which rolled a truck down a hill to impress the electric-vehicle crowd, still trades millions of shares each week. Why?

    Five things that leave even investing vets shaking their heads in bewilderment

5. A crash

For 47 years now, since I bought my first stock, someone has warned me that a market crash is coming. Sometimes they do. But most times they do not. Stocks can compound for years and years, and long-term investors can withstand (many times easily) some sharp and sudden market declines. This worry keeps investors up at night, for sure. Who wants to lose 22 per cent in one day (that was the percentage decline in the 1987 crash)? Sorry, we can’t really help with this worry much.

We have been around long enough to know such predictions cannot form the basis of an investment portfolio. The best strategy if this is a worry is to keep cash at a “sleep-at-night” level. Or buy stocks in companies that provide basic necessities that will still be needed, such as Procter & Gamble (PG). I am pretty sure if a crash happens next week people will still be brushing their teeth. If worried about a crash, you might not want to own stock in companies that make expensive discretionary products, such as Harley-Davidson (HOG).

Peter Hodson, CFA, is founder and head of Research at 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals. He is also associate portfolio manager for the i2i Long/Short U.S. Equity Fund. (5i Research staff do not own Canadian stocks. i2i Long/Short Fund may own non-Canadian stocks mentioned).

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