Pattie Lovett-Reid: How investors should adapt to higher yields
Are we approaching an inflection point for investors?
Interest rates are heading higher, but inflation is low and economic growth is apparent. And as U.S. markets hit highs and trade wars continue, it isn’t taking a lot for investors to dump out of stocks. Meanwhile, the yield on 10-year U.S. Treasuries has reached above 3.25 per cent, a level not seen since 2011, as Canada’s 10-year bond spiked 2.597 per cent to the highest level since 2014.
When it comes to U.S. equities, it would appear investors have only been on a one-way trajectory - and that way is up. However, seasoned investors know that is rarely the case. I would argue the same is true for the Canadian market, which has struggled to gain traction this year.
The long investor tends to focus on great industry leaders that are competitive and show strong balance sheets.
Does diversification still matter? You bet.
Diversification always matters but what makes this investment strategy work is asset allocation. How do you spread your money over cash, fixed income and stocks?
The mantra of the savvy investor is buy low and sell high, and in the process stay true to who you are as an investor. But it doesn’t always mean you will make money – you could be protecting yourself from a loss.
Statistically, stocks over the long term are expected to increase by about six per cent and bonds return three per cent on an annualized basis – but that assumes that each asset class moves in a straight line and we all know that isn’t the case. Timing can come into play: This is where you need to consider your time horizon and risk tolerance, and don’t forget – buying low doesn’t mean prices can’t fall even lower.
The value of rebalancing has more to do with risk control and managing your behaviour than boosting returns. As Lyle Stein, senior portfolio manager and managing director of Vestcap Investment Management said Wednesday, the key for investors is not to eliminate risk, but to follow a strategy that allows you to reduce risk.