As 2021 draws to a close, I’m going to review my year to date returns through my various asset classes, how I am positioned for the next year, what changes I need to make to my overall asset allocation over the course of the next six months, and my overall investment strategy.

Preparing for the Next Economic Down Cycle

I’ve used the four seasons—spring, summer, fall, and winter—analogy before and will reference it here once again for those who aren’t familiar with my writing.

The stock market and economy follow a path that is no different than the four weather seasons. We know, for a fact, that summer follows spring, and winter follows fall. Winter will happen. We know it will, just as we know that, for many reasons, the economy follows a similar cycle.

We’re currently at record low unemployment levels in North America, and the economy is firing on all cylinders. Inflation has been contained in the target 2% range for the last decade, and the Fed and Bank of Canada are keeping a close eye on monetary conditions and making tweaks when and where required.

The yield curve has flirted with short periods of inversion over the course of the last six months in both countries, and that usually (but not always) portends the end of the economic cycle.  Having said that, the economy is still firing on all cylinders as we head into the longest economic cycle since World War II.  When it will end is certainly not something I am equipped to address, and I spend very little time trying to time the market. For every article that proclaims the market is at the top, is another that suggests otherwise.

My plan is to build and manage a solid portfolio, which I will share with you, such that I have cash on the side to deploy when the economy turns and/or opportunities present themselves while staying invested in the markets by buying solid blue-chip investments.

I have eight investment rules I live by. These are rules that I created for myself so I know how to invest my portfolio. I shared my investment philosophy in this article: How I Protect and Grow My Wealth With These 8 Simple to Understand Concepts. 

I have two pieces of paper prominently displayed as a constant reminder on my credenza. One is my personal vision statement, and the second is my eight investment rules. I don’t read them every day of course, but their presence serves as a constant reminder when I am faced with decisions that relate to either.

Before I dive into my asset allocation, I will provide a brief summary of my 2019 portfolio performance.

2021 Portfolio Return Summary

As a point of clarification, when I reference my overall portfolio, I am referring specifically to any asset that drives a return, including cash sitting on the side, my apartment buildings, private equity, and anything derived from the markets. I am not referring to homes or cottages which certainly are factored into my overall net worth, but, not my yearly returns.

So far, year to date, my overall portfolio has increased by approximately 6.5%, which is 1.75% higher than I am targeting (NOTE, I finished 2019 with a 7.3% overall portfolio return).

The higher than expected returns, the additional 1.75%, is a result of the 20% year-on-year returns that I recognized with my stock investments which make up only 17% of my overall portfolio. In a nutshell, 17% of my portfolio drove 54% of my total return.

My target equity allocation is approximately 33% of my portfolio, so I am 16% away from my target. I am investing in opportunities on an individual stock basis, but more globally, when the economy turns, or there’s a 20% correction in the S&P, which is currently trading at all-time highs, I plan to deploy more aggressively.  As a further point of clarification, I include private equity in the 33% allocation, so, should another private equity or angel investment opportunity present itself, I will include that in the equity component. Needless to say, I have a lot of room left to reach my desired 33% allocation.

My overall objective with my portfolio is the preservation of capital. What I am trying to do is, after spending, and adjusting for inflation, is to see an increase in my net worth of about 4.75%. I am a conservative investor because I can be, and there’s no reason for me to be overly aggressive to drive my 4.75% return objective.

Real Estate

My real estate is doing quite well, both from a valuation perspective and also from a cash return perspective. The super-low vacancy rates of less than 1% for apartment buildings in the areas where I have invested has driven rents up significantly in the last year. Five apartments have turned over this year because the tenants chose to vacate, and in all cases, there has been a significant increase in rents.

In one case, the rent went from $925 a month to $1,600 a month: a $675 per month increase in profits. The renovations cost approximately $20,000. I’ll recognize an approximate 35% IRR, a yearly increase of $8,100 in profit, and assuming a 3% CAP rate, a $270,000 increase in the value of the building just from that one vacancy alone (the picture is the actual apartment).

I continue to look for real estate opportunities. I am looking specifically for a building with low CAP rates and rents below, or well below market so that I can renovate and flip the property. You can read more about my strategy here:  Here’s How To Buy An Apartment Building And Make A Whopping 110% In Three Years

The great thing about my investment real estate is that it produces a continuous stream of reliable income. Unfortunately, because of rent control, most of my rents are well below market, but there are two silver linings here:

• overtime, five, ten years, the rents will continue to rise due to the allowable rent increases, and apartment turnovers, so the rents are inflation-protected and will increase in time
• because the rents are so below market, I have considerable downside protection in the event of a sudden decrease in the average rent rate for apartments

With regards to the real estate, they do produce a healthy stream of cash flow, and I do include that cash flow as a portfolio driver and in my overall returns.

Preferred Shares

My overall portfolio produces a healthy stream of dividend and interest income. I favor the dividend income, considering the preferential tax treatment of dividend income over interest income, plus, the yields on dividends are considerably higher than the yields I am getting on bond or interest income. As a result, some of my fixed-income portfolio, approximately 2% of my overall portfolio, is invested in preferred shares.

I started investing in preferred shares in March 2019 and chose to invest in individual securities myself rather than an ETF.

I own approximately 50 preferred shares that I’ve bought over the course of the last nine months, and my preferred share portfolio is currently yielding a before-tax dividend return of 5.89%. The reasons I chose to invest in preferred shares myself over just buying an ETF are:

1. Most of the ETFs have a 0.50% MER which I believe is too high.
2. All the preferred share ETFs are too heavily concentrated in fixed-reset preferreds with very few perpetual. My portfolio is allocated at a 50% fixed reset, 50% perpetual, and I buy the preferreds when I see slight dislocations in an individual security. As a result, the portfolio has done reasonably well this year, compared to a benchmark ETF.
3. I buy the perpetual preferred shares because the fixed resets tend to do better in rising rate environments, and perpetuals tend to do better in falling interest rate environments. The two classes of shares trade counter-cyclically to some extent, so holding a combination of the two tends to even out the returns, plus, the perpetuals tend to be less volatile.

I finished 2019 with a 1.4% return on my preferred shares before factoring in dividends, and 6..9% after dividends.  The pref shares are considered fixed income in my portfolio.

I created a fairly extensive preferred shares screening tool in Excel that lists all of the preferred shares in the market, their call dates, current yields, reset rates, with a number of other screening fields that allow me to track the state of the market. Although the columns below won’t make much sense, you can see a snapshot from the screen below.

 You can read my article on preferred shares here. 

Equities 

I own approximately 40 Canadian and 50 US blue-chip stocks, many dividend-paying, and a few international ETFs that focus on Europe, emerging markets, India, and Australia. My equity portfolio concentration is approximately 55% US, 35% Canadian, and 10% international. Over the course of the next year, I plan to add a higher concentration of international by selling some US and Canadian and redeploying into international ETFs. My ideal allocation in stock equities is:

• 45% US
• 30% Canadian
• 25% international

When I reference stock equities, I am speaking specifically about anything I can buy on the stock markets, not private equity.

My Canadian equity portfolio is skewed heavily towards financials (the banks), and utilities, and my US is more equally distributed across multiple sectors.  The Canadian utility sector advanced by 32% so far year to date.

My Canadian portfolio is up by 15% YTD, my US portfolio is up by 22% YTD, and international is up by 8% after factoring in dividends.

With regards to dividend stocks, I favor Dividend Aristocrat (25 plus years of rising dividends) and Dividend King (50 + years of rising dividends) stocks. I don’t buy any oil and gas as I find the sector to be too volatile, and frankly, I just don’t understand the sector. Plus, with the pace of change in renewables, I’m of the belief that there are too many existential threats to the long-term state of the oil and gas industry.

I’ve built an equity screening tool that’s similar to the preferred share tool that allows me to track a number of different metrics like PE, dividend yield, ROE, payout ratio, dividend growth, and more.

The Wall Street Journal just published its list of the Best Managed Companies of 2019 (paywall), and the ten top companies are as follows:

1. Amazon
2. Microsoft
3. Apple
4. Alphabet
5. Cisco Systems
6. Facebook
7. IBM
8. Johnson and Johnson
9. Intel
10. 3M 

Of the top 10, I own shares in all of them except for IBM and 3M. I have no plans for buying IBM, but 3M is on my watch list. 

I invest in blue-chip, solid businesses that are expected to have better earnings per share in the next two to six years, I look for situations where there’s a turn-around expected, dividends have been increasing over the years, where new management is in place that will improve earnings, where the business has a competitive moat, and/or, situations where shares are trading significantly under value. In all cases, I am looking for businesses with a solid balance sheet.

I do trade the account infrequently, but, will either trim a position when I believe it’s grown too large in my portfolio, I have some concern with the long term prospects, or, will drop a stock if I’ve lost faith in the company. Some good examples include:

SNC Lavalin – I held on for a brief period while they were going through the scandal, but, I sold the stock the day they announced the sale of the 407. I bought the stock many years ago when SNC Lavalin bought the highway 407.

Netflix – I bought Netflix in 2013, held on while the stock rose by hundreds of percent, and then trimmed in multiple periods over the course of the last year as new competitive threats entered the market (Disney for example).

Disney – I bought Disney this summer as I trimmed Netflix. I believe Disney will be a formidable threat in online streaming 

Additional stocks that I own, both US and Canadian, include:

Canadian Stocks That I Own:

• CIBC
• TD Bank
• Bank of Montreal
• Scotia Bank
• Royal Bank
• First National
• Great-West Life
• Sunlife
• Bell Canada
• Brookfield (My favorite stock, of which I own all five Brookfields)
• Algonquin Power
• Emera Corp
• Capital Power
• Fortis
• Hydro One
• Enbridge
• Nutrien
• Onex
• A number of REITs (both individual and ETF)
• And quite a few more stocks and some ETFs

Three stocks I’ve done particularly well with, which were purchased for capital appreciation, are: 

• Shopify (I bought this in October 2017, and so far, it’s up over 300%
• Lightspeed (I bought this at the IPO in the early part of 2019, and it’s up 67%)
• Constellation Software (Also an excellent growth company that I bought in Feb 2019, and so far it’s up 21%

USA Stocks That I Own:

• Berkshire Hathaway
• Goldman Sachs
• Visa
• Walmart
• Costco
• Ford
• JP Morgan
• Home Depot
• Blackstone Group
• Bristol Myers
• Blackrock
• Netflix
• AbbVie
• Diageo (British)
• Iron Mountain (Excellent dividend)
• Salesforce
• Annaly Capital Management (an mREIT)
• A number of other REITs
• Slack (Down 41% since I bought it, and I’ll likely sell it because I’m not as confident as I once was)
• And quite a few more stocks and ETFs

I’m paying particular attention to two US REITs that I just purchased, both of which are down this year because of competitive threats by Amazon.  Simon Property Group (NYSE:SPG), and Tanger Factory Outlet (NYSE:SKT). Both REITs own high-end shopping malls, and their stocks are very undervalued (in my opinion), and both have fairly high dividends, 5.5%, and 9% respectively.

Cash and Fixed Income 

I have a laddered portfolio of GICs (T-Bills) with a 3-month to 5-year expiry and holdings in both ultra-short-term and short-term bonds in both Canada and the US. Some examples include:

Canadian Bond ETF:

• BMO Ultra Short Term Bond ETF – TSE:ZST
• iShares Canadian Universe Bond Index ETF – TSE:XBB
• iShares Core Canadian Short Term Bond Index ETF – TSE:XSB
• iShares Short Duration High Income ETF (CAD-Hedged) – TSE:CSD 

USA Bond ETF:

• iShares iBoxx $ Investment Grade Corporate Bond ETF – LQD
• iShares Ultra Short-Term Bond ETF – ICSH
• Blackrock Multi-Sector Income Trust -BIT
• iShares Short-Term Corporate Bond ETF – IGSB
• iShares Core US Aggregate Bond- AGG

The cash and fixed income portion of my portfolio comprise slightly over 40% of the overall allocation and currently has a yield of approximately 3%. So far, year to date, my fixed income portfolio is up by 3.1%.

Preparing My Portfolio for Winter

My portfolio is quite defensively positioned at the moment, with the expectation that winter is on the way. I am uncertain when it will happen but know that it will, so my cash and fixed income investments are fairly short term and ready to deploy. 

My portfolio has a large allocation to fixed income and real estate. My desired overall allocation is (you can read why in my book which you can download for free from here):

• 33% fixed income
• 33% equity
• 33% real estate

My current allocation is well below in equities, and well above in fixed income, Real estate is more or less in line.

I have a large mix of assets in both the US and Canadian currencies, and my portfolio has been optimized for tax efficiency wherever possible. 

Preferred shares are a good example of a recession-proof asset because preferreds pay enhanced dividends, which are protected to a large extent, as the underlying providers are all blue-chip with well-covered dividends that must be paid prior to common shares, a par value of $25 should they be called, and an increasing dividend yield should the share price decline.

I intend to hold these pref shares for the longterm, so I’m not too concerned about the loss of capital. Plus, I’ve built a portfolio mix of fixed reset and perpetual shares that trade counter-cyclically to one another, and if the share prices do drop, then my income stream is safe.

Real Assets

As I mentioned above and in an article I did on real assets, I have been holding an increasingly larger position in companies that focus on real assets, namely Brookfield (TSE:BAM) and their other subsidiary companies, The Blackstone Group (NYSE:BX), REITs, and my own apartment buildings.

Real assets are inflation-protected, and these companies have long-term leases—in many cases, triple net—across a broad cross-section of international assets. They invest in alternative investments, private equity, infrastructure, and renewables. I follow both Bruce Flatt and Stephen Schwarzman (CEOs of Brookfield and Blackstone) and try to understand their investment philosophy and how they invest their capital. My holiday book will be Stephen’s #1 book that just came out in late September.

You can read my article on real assets here: What are Real Assets and How to Diversify Your Wealth by Investing in Them.

Patience and Discipline Will Prevail 

I am a patient long-term investor. I am not looking for a quick buck in almost any of my investments, and that includes my private equity holdings as well. No one security comprises more than 3% of my overall portfolio (other than my real estate), and I have at least 160 different positions overall (including the preferred shares). I do leave a few dollars aside to “play”, and in those cases, I will take a very small position, mostly for fun, on a longshot (like Lightspeed and Slack, for example). Lightspeed has done extremely well, and Slack is my worst performing investment, by far, this year. 

It might seem like 160 positions is a lot, and it is, but, I watch them relatively closely, and I don’t intend to trade the stocks unless something changes with the underlying fundamentals. Plus, I enjoy the research and challenge.

I don’t chase yield, even in this yield-starved environment, nor do I buy the latest shining star company or industry, for example, I don’t own any cannabis stocks or bitcoin., although I might take a flier from time to time.  My perspective is very long-term, and I assess the present situation, both macro, and micro, knowing that time will inevitably throw curveballs at both the economy and business, and my portfolio should be ready for that, so, I am quite defensive as a result.

I believe it’s time in the markets, not timing the markets, that will make me a successful investor. I hold quality assets, diversified across industries and currencies, that are optimized for tax efficiency wherever possible. I’m not looking for a quick buck. Should I decide to act on a larger position, like real estate or private equity, it will be methodical and well-timed.

I’m certainly not hoping winter will arrive, but, I expect that it will sooner than later. After all, and according to the German proverb, trees don’t grow to the sky.  When winter does arrive, I am prepared, and although I expect my current stock investments will decline, I expect that there will be many buying opportunities. 

I’ll conclude with the following: when Peter Lynch was asked what’s needed to become a great investor he said “In the stock market, the most important organ is the stomach. It’s not the brain.” If you come up with a long-term plan, don’t get spooked by the short-term gyrations in the market. Develop a plan, and stick with it.

Before you go, I have two things to share: I have an article I think you might be interested in reading on how to become a decamillionaire, and just below, I dive into a short synopsis on my current asset mix allocation:
How to Become a Decamillionaire, Grow your Net Worth to $10 Million, and Join the 1% Club

How I came to Follow My Current Investment Allocation

I’ve shared my investment philosophy in countless blog posts and discussed in great detail how I built my portfolio over the last 30 years.

 A very short summary: 

My traditional allocation prior to the sale of my business in October 2017 was to invest in three equal buckets with my assets divided into

1. Cash and fixed income (bonds, CD, GICs)
2. Real estate
3. Equity in my business

You can read about my investment philosophy and how I was able to produce an approximately 30% year-on-year compounded return, largely driven by my real estate and mostly by my business’s profits, over the last 28 years by downloading my book for free.

My portfolio was simple to manage, and I spent no more than a few hours every month looking after these allocations. Frankly, there wasn’t much to look after except for the real estate, and in that regard, I worked closely with my property manager to manage my apartment buildings.

Everything changed with my portfolio in October 2017 when I sold my business, and my first and third buckets, cash and business equity, changed significantly. My equity went down to a small fraction of my overall portfolio, and my cash increased significantly.

Over the course of the last two years, I’ve spent a considerable amount of time reallocating my positions and studying asset allocation.

I’ve chosen not to work with an investment advisor for many reasons, and which I have detailed in a number of other posts. My three-bucket strategy is more or less still in play, but I’ve now been forced to reallocate my equity and cash positions to a great extent.

I’ve been of the belief for the last two years, and since I started studying asset allocation, that we’re in the later stages of the current economic cycle. My perspective isn’t that I need to time the market and play the stocks up and down but build a portfolio that will withstand the ebb and flows of the economy, while at the same time, providing me with a healthy stream of dividend and interest income.

I have held a larger position in fixed income, primarily cash and ultra-short-term US and Canadian bonds, with the expectation that opportunities will present themselves when the economy turns. I’m still deploying my cash into solid blue-chip US, Canadian, and to a much lesser extent, international ETFs, and continue to look for attractive multi-unit-residential property opportunities.

DISCLAIMER: Any opinions stated above are mine, and mine alone. I am not recommending that anyone trade on any of my recommendations but provide these as examples for reference purposes only. Should you decide to purchase something that I reference, you must do your own due diligence.

You should consider subscribing to my blog. I publish one article a week on small business and wealth creation.  You can subscribe here.

Also, I published a book during the summer of 2018, “The Kickass Entrepreneur’s Guide to Investing, Three Simple Steps to Create Massive Wealth with Your Business’s Profits.” It was number 1 on Amazon in both the business and non-fiction sections. You can get a free copy here.