DIY investors seem woefully unprepared for the next market crash. Plus, can HDIV’s 8% yield be trusted?

A homework assignment for do-it-yourself investors: Get your portfolio up on your screen and ask yourself how well it would hang together if stocks crashed.

The next crash is out there somewhere – timing and cause to be determined later. What we know for sure right now is that do-it-yourself investors using online brokers have portfolios that in aggregate seem unready for this kind of a setback.

Details on DIY portfolios can be found in Investor Economics’ Retail Brokerage Report, Winter 2022. It shows that stocks accounted for 66 per cent of portfolios at the end of last year, while bonds and guaranteed investment certificates accounted for 2.3 per cent, exchange- traded and mutual funds for 18.3 per cent and cash and other investments accounted for 13.4 per cent. Let’s estimate that one-third of the money invested in funds is in bonds, with two-thirds in equities or other risky assets. This leaves us with something like 78 per cent exposure to stocks, 8.3 per cent bonds, and the rest in cash and other investments.

Close to 80 per cent exposure to stocks is too much for investors who are close to or in retirement, unless they have more wealth than they need and can afford to weather a sharp drop in stock prices. Stocks quickly rebounded from the crash of March, 2020; the next downturn might not reverse that quickly.

A bond weighting of just 8 per cent sounds smart in the context of the recent decline in bond prices, but it’s a nearly useless hedge against a big stock market decline or a recession. The cash weighting of almost 14 per cent does add some stability in periods of market volatility. However, cash held in brokerage accounts is pretty much dead money today. Worse than dead, actually, with inflation running at 5.7 per cent.

Another issue with this cash weighting is that it suggests a high degree of market timing among DIY investors. Having cash right now does seem defensible, given how both stocks and bonds have fallen lately. Opportunities to buy low are coming at some point. But will DIY investors put their cash to work in time?

There’s actually some evidence to suggest that this is possible to a limited extent. The Investor Economics data show the cash allocation five years ago was 16.8 per cent, which tells us investors have reduced cash somewhat over a period of fabulous stock market gains.

However, the allocation to pure fixed income is less than half of what it was five years ago, while stock holdings are up by a few percentage points. It may be time for a rebalancing in your DIY portfolio to adjust your mix of stocks, bonds and cash. Find out now, before things get ugly.

— Rob Carrick, personal finance columnist

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The Rundown

After sizzling rebound, investors weigh whether stocks have more bounce

Wall Street stormed back last week after absorbing a long-awaited rate hike from the Federal Reserve, leaving investors to determine whether stocks are set for a sustained rebound or more turbulence. The TSX, meanwhile, closed at a record high on Friday and is now positive for the year. Lewis Krauskopf of Reuters reports on what various big market players are thinking comes next.

Three safe havens to consider amid the current market turmoil

Investors spent the past two years counting their profits. Now they’re counting their worries. Start with the worst inflation in four decades. Then add a bloody war in Europe. As well as a lingering pandemic, slowing earnings growth and rising interest rates. Problem is, there are no obvious safe havens for investors to gravitate to. But there are some interesting hedges against what could happen next. Ian McGugan tells us about three of them.

As the threat of stagflation looms, investors dust off their playbooks

The combination of a weakening economy and uncontrolled inflation is rare enough that few investors today have any experience with it. But the pros are suddenly on high alert. More than 60 per cent of global fund managers surveyed by Bank of America are now forecasting stagflation – a near doubling from last month’s survey results. For the first time in four decades, many investors are dusting off the stagflation playbook. Tim Shufelt takes a look at what that means for portfolio adjustments.

Is this ETF’s yield of 8 per cent too good to be true?

The popular Hamilton Enhanced Multi-Sector Covered Call ETF (HDIV-T) has a yield of about 8.2 per cent. Whenever a yield reaches into the high single digits, it’s imperative to dig deeper. In HDIV’s case – as with many similar high-yielding products – there is a lot going on behind the scenes that investors need to understand before taking the plunge. John Heinzl explains.

Why TikTok and Instagram have become go-to sources for financial advice

Bloggers and YouTubers have been creating down-to-earth and friendly financial content since well before the pandemic. But financial advice on platforms like TikTok and Instagram exploded when COVID-19 restrictions and a 21-month stock market rally drew scores of home-bound millennials and Gen Z novices to financial markets and to seek out online money-management information. Erica Alini has some tips on how to filter out the mass of bad-to-downright-ugly financial content and find the best of what finfluencers have to offer.

What this $285-million Calgary portfolio manager is buying and selling

Patti Dolan doesn’t see an urgency to rush into the market right now, even if the volatility presents buying opportunities in some sectors. But Ms. Dolan, a senior wealth adviser and portfolio manager at Wellington-Altus Private Wealth in Calgary, who oversees about $285-million in assets, has been making some adjustments to the portfolios she runs. The Globe and Mail recently spoke with Ms. Dolan about what she’s been buying and selling, as well as investing advice she gives to friends and family.

Also see: Outperforming CI fund manager Aubrey Hearn is picky about small- to mid-cap stocks

The best predictor of bitcoin’s price is foretelling a bear market

In the cryptocurrency world, there’s an event similar to a central bank rate adjustment in the mainstream economy: bitcoin’s “halving.” It’s far from the same as changing the benchmark interest rate, but it is also a high-level, wide-impact event that foretells which way the market winds will blow. And much like how central bank rate hikes – and the talk of them – have dampened the past year’s surging stocks, bitcoin’s halving trends are now also pointing to a bear market for cryptocurrency. Ethan Lou explains.

Others (for subscribers)

Gordon Pape: My High-Yield Portfolio continues to perform well, averaging annual growth over 10%

Scotiabank eliminates funds with embedded advisory fees for discount brokerage

Monday’s analyst upgrades and downgrades

Monday’s Insider Report: Director cashes out $19-million from this stock that’s rallied over 80% in 6 months

Globe Advisor

How uncertainty over cryptocurrency tax rules can impact portfolios

How to invest in the metaverse while the space is still developing

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Ask Globe Investor

Question: In a recent column, John Heinzl said that when shares have dropped in value and they are transferred to a tax-free savings account, the investor cannot claim a loss for tax purposes. What about a situation where stocks that have gained in value are transferred to a TFSA? Will capital gains taxes be avoided in such situations?

Answer: No. Capital gains taxes still apply when you transfer a winning stock from a non-registered account to a TFSA (or any other registered account). The CRA considers this a deemed disposition, and the tax treatment is the same as if you had sold the shares.

This might strike some investors as unfair. After all, if you transfer losing shares to a registered account the capital loss is denied for tax purposes. Similarly, if you sell a losing stock and you – or a person affiliated with you such as a spouse or a corporation controlled by you or your spouse – repurchase the same stock within 30 days (before or after the sale date) it is considered a “superficial loss” and cannot be used for tax purposes.

Unfortunately, the rules are different for capital gains.

As a blog post on adjustedcostbase.ca explains: “If you sell shares and realize a capital gain, but immediately repurchase the shares, can you call this a ‘superficial gain’ and defer the capital gain? The answer is no: you cannot defer the capital gain and there is no such thing as a ‘superficial gain.’ The capital gain is taxable immediately in the current tax year, even if the shares are repurchased within 30 days.”

–John Heinzl

What’s up in the days ahead

The Contra Guys examines the investment case for financial services firm RF Capital Group.

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Compiled by Globe Investor Staff

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