A Comment -- General Comments From an Expert (A Commentary)

The Importance of Cash in an Investment Portfolio

A diversified portfolio typically includes a cash component to it, and this cash holding provides an investor with liquidity and convenience. Traditional portfolio theory suggests that investors should carry some static percentage of their portfolio in cash to act as a diversifier against volatility in one’s portfolio, for liquidity purposes to add to one’s existing bond or equity positions, or fund new purchases.

While cash in a savings account, bonds, GICs, and others, have usually offered lower yields than the returns that can be found in the stock market, the benefit that the liquidity and stability cash offers can sometimes outweigh the benefit from the higher returns that stocks offer.
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Yes, and also the All-World index. It's really just the S&P, NASDAQ and Russell that are lagging; probably because they outperformed for 10-15+ years. There are good buys out there, and people are feeling good. 

Impact from tariffs seems to be limited for now. Q1 earnings were pretty decent. Those companies that said tariffs were going to be bad, were bad. The NA economy is service-based, and the impact of tariffs is not material. Headlines about Trump and Xi speaking on Friday. Market's feeling as though the worst of the tariff threats are over -- all the bad news has been delivered, and maybe some good news will come out.

May start to see interest rate cuts in both Canada and the US as we head into the end of the year. Hopefully, inflation will start to come down to a more normalized level. Corporate earnings are strong. Summer is starting in Toronto :)  Things feel good.

The market always climbs that wall of worry. It overreacted insanely in April, so dumb, and that was the opportunity. Now markets have gone back to a level similar to where they were in January.

Haven't seen this yet. Both BOC and the Fed have to see either all tariffs removed or consensus on a certain percentage. We haven't seen impact of tariffs on inflation numbers yet. 

But there are all these offsets. Seeing declines in rental costs, commodities, gas prices, other products. Economics are very hard to figure out. If there's a price rise in one asset class, there could be a decrease in something else as people switch their demand.

He's not too concerned about tariffs. Biggest worry is what Trump is going to say tomorrow. The companies he owns are adapting. We should expect a pretty good year for corporate earnings. 

Believes BOC will not cut tomorrow, but hold steady. They'll probably want to wait to see when the US starts cutting again. Keep in mind, BOC cut 7 times already. One worry is that the CAD has been really strong against the USD. BOC will also want to see how the employment situation plays out over the next few months.

As inflation numbers come out over the rest of the year, thinks the Fed and BOC will both cut 2-3 times.

He's more freaked out about what happens in 2027 if Carney brings back the capital gains increase. If you're rich, get used to being taxed more because NA is broke and the deficits are out of control. He saw that Carney wants to fast-track infrastructure spending, but where's this money going to come from? It's going to come from taxing the rich.

It absolutely won't change at his firm how they make investment decisions and buying US stocks. They don't buy stocks for the dividends. He focuses on long-term trends of the companies they own and what's going on in front of him right now. Maybe Trump will TACO this one too.

If you need a large amount of money from your portfolio within a year, get it out of the stock market. Anything can happen like a pandemic or an April 2025.

Various reasons to sell. He sells if he finds a better investment idea. Management team does something that doesn't create value. Or the fundamentals don't prove themselves anymore. Buying back stock with debt. Balance sheet getting worse. Revenues aren't growing as fast as before or are going negative.

One reason not to sell: market volatility. He's a long-term investor who focuses on the fundamentals.

You have to think about what consumer prices are going to look like and how consumers may have to cut back. 2/3 of all economic growth comes from the consumer. If they have to cut back on spending, then chances are that profitability may be weaker in the coming quarters.

His team sets a plan and sticks to it. In a 30-stock portfolio, he'd have about 4 Canadian, 13 US, and 13 international. It's not where the companies are domiciled, it's about where the revenue streams are coming from. 

He's gotten emails over the past weeks about the CAD vs. USD. Important to understand that currency risk becomes benign over a 10 to 20-year time horizon. If you think about the USD vs. CAD, the annual change over 25 years has been 0.2%. With Europe, it's been 0.6%. So don't fret.

His approach is to have a list of stocks, and each client's portfolio is customized with 30 names. They look at the percent weightings in the portfolio. When it comes time to do some buying, they look at the ones with the lightest weight because those are the ones that are down the most. The expectation is that, at some point in time, profits will return and stock prices will turn around and start to go up again.

Stay in the game. Protecting your losses is much more important than how much you make.

The way they manage risk is to not only keep the percent weightings in line, but also to keep 50% in the 4 inelastic industries:  consumer, healthcare, financials, and utilities. The other 50% can go in the more volatile technology or industrial sectors. By country, again, he keeps that 20/40/40 mix among Canada, US, and international. 

He wants to have 50% in large caps, where most of the profits are being used to pay out dividends, and that's the income side of the portfolio. Still wants to have another 40-50% in small-mid caps; that's because more of the profits are going back into the business for capital appreciation over time. This way, you get that nice blend of income and growth. Dividend growth offsets inflation.

He doesn't have to chase sectors or areas because they're global managers. So when EMs and Europe took off, they were already there and benefited from it.

He favours insurance companies over banks right now. What's going to happen to all those people who bought houses in 2020 with 20% down, with 5-year fixed mortgages at 1.5%? The value of their home has dropped 20%, now they have no equity in their house, and they suddenly become high risk. 

Canadian banks haven't yet had to face this problem. If payments double or triple, and more income has to be allocated to debt repayment, that will impact loan loss provisions and profitability. Most banks raised provisions, but not enough. BOC may have to lower rates to keep the economy going, and that's not good for banks either.

Markets are becoming somewhat desensitized to the rapidly changing tariff outlook. President "TACO" spoke out on Friday, so markets didn't have a real chance to respond. So last night, as futures opened, they were softening. But this morning, we're right back to an upswell on the day for the US market.

On today's Educational Segment, he'll talk about where he thinks the focus will go and, ultimately, hard economic data and how the economy will play out in the back half of the year with all these things factored in.

President Trump knows that low oil prices are needed to contain inflation. We're in a regime where between now and the midterm elections, from a US perspective, low oil prices are a good thing because that will help the average family.

Oil prices have come down. Over the last 3-4 years, it was thought that under $70 the US would be buying back for the strategic petroleum reserve. Now he thinks they will, but it will be below $50 at some point. That support for the market's been deferred. As long as supply exceeds demand, prices will remain well contained, notwithstanding the little bump we got today.