Continue to buy gradually, emphasizing diversified, conservative Canadian and international (ex US) equity funds.
Hold your US stock funds but put new money into conservative Canadian and international equity funds.
We think US stock valuations are rather high. We therefore recommend new money be added to non-US equities now.
At the moment, the US stock market is dominated by a handful of well-known technology stocks—Alphabet, Amazon, Apple, Facebook and Microsoft. When you invest in US mutual funds now, chances are you’re also investing some of your money in these stocks. But their valuations haven’t been this high since the tech bubble of the late 1990s. That makes them vulnerable to a sharp setback if investor sentiment turns against them.
Better to follow the lead of legendary investor Warren Buffett. Mr. Buffett, billionaire and CEO of Berkshire Hathaway, has taken five-per-cent stakes in Japan’s five biggest trading firms. This move is not only motivated by high stock valuations in the US. Mr. Buffet also expects inflation to move higher and the US dollar to decline.
Since March, the world’s central banks have deployed more than US$9 trillion to combat the fallout from the COVID-19 pandemic. Many believe this stimulus will result in inflation that will ultimately benefit commodity prices. Notably, the five Japanese firms that Mr. Buffett has taken a stake in have some commodity exposure.
Continued US dollar weakness, meanwhile, could make other international stock markets more attractive for Canadian investors than those south of the border. A deteriorating US dollar, after all, will detract from your US equity returns in Canadian dollar terms.
Strategies to adopt
We recommend new money be directed mostly to conservative Canadian and international (ex US) funds. Mawer International Equity Fund is an excellent conservative, diversified fund that invests largely in Europe, Japan and Asia. We also view Pembroke International Growth Fund as a good solid choice, though we regard it as a little more aggressive.
If you don’t mind increased risk, you might want to add to one or more of our recommended regional funds. Dynamic Asia Pacific, Invesco Europlus and RBC Emerging Markets Equity funds each have distinctive focuses and don’t invest in the US.
In Canada, Fidelity True North, Mawer Canadian Equity and Phillips, Hager & North Canadian Equity funds offer a diversity of management styles while remaining in large-cap stocks.
Two of our High Risk International Specialty Funds give you exposure to commodities. Gold stocks have done very well this year. Nonetheless, there’s an argument for continuing to hold some exposure to gold if inflation does indeed pick up. Our recommended fund here is RBC Global Precious Metals.
We recommend holding your US stock funds, but not adding to them.
This is an edited version of an article that was originally published for subscribers in the September 11, 2020, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.
Money Reporter, MPL Communications Inc.
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Money Reporter •10/14/20 •