Five Questions for Bill Richardson Part 3

1. When I watch the financial news, at the top of the list is the Toronto Stock Exchange performance.  How closely do you track the TSX 60 or TSX Composite?

This is a really interesting question for a number of reasons.  They are similar but the TSX 60 is an index comprised of 60 stocks and the Composite is broader and is based on about 300 companies. 

Both indices have similar sector allocations but to keep it simple, let’s focus on the TSX 60.  The top three sectors are Financial Services (33%), Energy (15%) and Basic Materials (11%).   Now that’s a problem!  Energy and Basic Materials (mostly mining stocks) tend to be better for traders and not longer-term investors. 

We prefer to use the S&P 500 where the allocation to these three sectors is Financial Services (14%), Energy (3%) and Materials (2%).  The top three in this index are Technology (23%), Healthcare 15% and Financial Services (14%).  Big difference!

One other issue with indices is that they are “cap weighted”, meaning that the bigger companies make up a bigger percentage of the index.  Focusing on the S&P 500, Microsoft, Apple, Amazon, Facebook and Google are the five biggest stocks in this index and the top three make up 15.5% of the index.  Compare this to Netflix, the 25^th biggest company at 0.73%.  So go the top three, so goes the index.

A final point about indices is that the S&P 500 is made up of 500 companies and the level that you hear quoted is the average price movement, based on the weightings of the stocks.  If you buy the index, half the companies are better than average and half are below.  Why would you want to invest in the 50^th worst company in the index.  We focus on stocks in the top 20 to 25% based on stock fundamentals.

 

2. Do you ever look at demographics when making your decisions about what stocks to buy?

Absolutely!  There are two major demographic groups in North America – Baby Boomers and Millennials and the three sectors that really matter for these groups are Consumer Cyclical (Amazon, Home Depot and Lululemon), Consumer Defensive (Clorox, Pepsi and Hershey) and Healthcare (Johnson & Johnson and United Health).

There are 88 million Millennials in the US (between 15 and 35) and they need to buy everything: cars, houses, baby needs, etc. and they buy through Amazon, especially since COVID-19.  They also need to buy beer and recreational beverages. 

They also need a place to live and companies, like Western Wealth, who buy apartment buildings built in the 1980’s and refurbish them provide Millennials with inexpensive accommodation.

Baby Boomers need healthcare as they age but many are downsizing so consumer stocks will be less influenced by these companies.

 

3. I have been reading about Low Volatility ETFs and wanted to get your opinion?

Another interesting question.  BMO has three of the most popular low volatility ETFs – Canadian, US and International.  They have been good and tend to steer away from sectors like Energy and Materials but they are still relatively volatile.  In the COVID-19 decline the Canadian version dropped 34%.  The US version dropped over 25%, which was good compared to the indices.  Prior to that, declines were in the range of 10 – 12%.  In my opinion, Low Volatility ETFs are good but if you want to keep volatility down, you need to use them in a more diversified portfolio.

 

4. I have a portfolio made up of 15 mutual funds, so I am well diversified, right?

This is one of my favourite questions and the answer is not necessarily.  People often think that by buying a wide range of mutual funds, they have diversified properly but it all depends on which funds you bought and the securities in the funds that they hold. 

We have software that allows us to enter in the funds that you hold and the software looks inside the individual funds at the top holdings.  It then puts all the holdings in a big box (speaking analogistically), sorts them and gives us a report of what the composite portfolio looks like. 

Often, what you find when you do this analysis, that you may hold 500 stocks and your portfolio performs and has the same risk profile as the TSX Composite or S&P 500 with higher fees and poorer performance. 

If you have such a portfolio, send it over to us and we’ll do the x-ray and show you what you really own.

 

5. Do you give second opinions?

Absolutely!  This is a great way to show off our processes and technology.  We are here to help people to achieve their financial goals and we work hard to help you, your friends or business associates.  No cost, no obligation.