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LARRYBERMAN

ThebestwaytodiversifyyourportfolioAddto...
LARRYBERMAN

SpecialtoTheGlobeandMail

PublishedFriday,Apr.21,201712:56PMEDT

LastupdatedMonday,Apr.24,20179:51AMEDT

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TheonlyfreelunchonWallStreetisdiversification.

Puttingassetsinyourportfoliothatcanhelpreduceyourriskistheprudentthingtodo.

For15years,analystsandstrategistshavebeentellingyoutobebearishonbondsthatpriceswouldfallandyieldswouldrise.Untiltheelectionof
DonaldTrump,therealityislongtermbondshaveoutperformedstocksforthepastdecade.

Whilethatsuggeststhebestofthebondmarketrallymaybebehindus,thesamecouldbesaidfortheequitymarketrally,givenloftyvaluations.

Fromayieldperspective,longU.S.treasuries(TLTQ)yieldabout2.8percentandlongCanadiantreasuriesyieldabout2.0percent(ZFLT).This
comparestoayieldoflessthan2percentfortheU.S.equity(ZUET)marketanda2.7percentyieldfortheS&PTSX(ZCNT).

Fromthatperspective,theU.S.bondmarketismoreattractivethantheCanadianmarket.TheCanadianequitymarketismoreattractivethantheU.S.
market,especiallyinataxableaccountwherethedividendtaxcreditoffersabetteraftertaxreturn.

Currently,a5basispointmovein30yearU.S.bondsisequalto$1inpriceorabout1percent.BecausetheinterestratecoupononthelongCanada
bondislower,about4basispointsisequalto$1inprice.IfU.S.longbondratesfall25basispoints,thatsapricegainof5percent.Lookingat
markethistory,thatcouldeasilyhappenifthestockmarketfalls5to10percent.U.S.longbondsfoundyieldsupportaround3.20percentin
DecemberandMarch,andwouldneedtomakeacleanbreakabovethatforamorebearishscenariotoplayout.DespitetheFederalReservesdesire
toraiseshorttermratesin2017and2018,thebondmarketisbeginningtosuggestthatmaycausearecession.

Historically,fromariskperspective,longbonds(withamaturityof20yearsormore)aretypicallyequaltoorlessriskythanequities.Thegraphic
showsthetotalreturnandstandarddeviationofreturns(risk)overthepast2years.

Longbondsarealsothemostnegativelycorrelatedwithequities,meaningtheyareyourbestwaytodiversifyyourportfolio.Thetableshowsthe
correlationbetweenthefourETFassetclassesoverthepast2years.Acorrelationof1meanstheassetsofferzerodiversificationbenefitanda
correlationof1meanstheydotheexactopposite.Acorrelationofzeromeansthereturnsoftheassetshavenocorrelationandthatisoptimalfroma
diversificationstandpoint.Forlongerterminvestors,alownegativecorrelationisidealtoaddasleepatnightbenefit.

Ifweonlylookedatpastreturns,wewouldhaveanallequityportfoliorightnow,andthatmaynotbethebestideagoingforward.

FromwhatIcantellfromtheweeklyBNNviewerquestionsIvereceivedovertheyears,mostinvestorsonlyconsiderreturnswhenmaking
investmentdecisions.Becauseunlessyoureallydoyourhomework,therisknumbersofassetsarenotwelldisclosedbytheindustry.Peopleonly
tendtoconsidertherisksideafteritgetspainful,andtheyhavepaperlossesmakingthemlosesleep.

Ivebeensayingforyearsthisisthebiggesttragedyfordoityourselfinvestors.Professionalshavemanywaysofmeasuringhowriskyapositionis,
butindividualinvestorsdonot.

Theaverageinvestorreallydoesnothaveawaytomeasuretheirportfoliorisk.Whatdoesmediumriskreallymeananyway?InapassiveETF
portfolio,itmeansthatyoubetterbeokaywitha20percentdeclineevery5yearsorso.Andwithbondyieldsaslowastheyare,youdonotgetthe
sametypeofprotectioninabalancedportfoliothatyouoncedid.

IvebeenaddingtomyU.S.longbondposition(TLT)inrecentmonthsasawaytolowermyportfolioriskandincreasemysleepatnightfactor,
whilenothurtingmyportfolioyield.Longbondsarefarbetteratprotectingyourportfoliovaluethansittinginlowyieldingcash.Theimportant
thingtorememberisthatbeingatacticalactiveinvestorisprudentifyouknowhowtouseallthetoolsthatareavailabletoyou.

Doyouwanttolearnmoreabouthowtonavigateworldmarketsbetter?ItalkabouthowtobuildsmarterETFportfoliostodealwithsomeofthe
uncertaintieswemayfacein2017andbeyondinmyupcomingeducationalseminarsacrossCanada.Registrationisfreeatwww.etfcm.comandyou
canfollowmeonmynewblogwww.bermanscall.comorwatchmeatBermansCallMondaysat11amET.FollowmeonTwitter:
@LarryBermanETFonFacebook:ETFCapitalManagement.

ReportTypo/Error

FollowusonTwitter:@GlobeInvestor

TICKERSMENTIONEDINTHISSTORY

TLTQIsharesLehman20Year
LatestPrice$122.93
0.61
(0.49%)
ZFLTBmoLongFederalBondIndexEtf
LatestPrice$17.91
0.08
(0.44%)
ZUETBMOS&P500HedgedtoCADIndexETF
LatestPrice$36.28
+0.37
(+1.03%)
ZCNTBMOS&P/TSXCappedCompositeIndexETF
LatestPrice$21.24
+0.16
(+0.78%)
UpdatedApril243:56PMEDT.Delayedbyatleast15minutes.

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Topics

DonaldTrump
UnitedStatesFederalReserveSystem

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