Why bonds are a must in unsettled times

Tom Bradley isn’t willing to predict where stock markets are going in the short term, but the Chairman and Chief Investment Officer (CIO) of Vancouver’s Steadyhand Investments does have a strong opinion on how investors should prepare themselves for what lies ahead.

“It’s a pretty boring answer,” says Mr. Bradley, who co-founded Steadyhand in 2006 after 14 years at Phillips, Hager & North. “Stay diversified and I mean really diversified.”

Steadyhand manages more than $900 million in investments for over 3,000 Canadians and has a reputation for transparency, simplicity and low fee equity and fixed income funds.

By diversification, Mr Bradley means a balanced portfolio, which includes bonds, even though at rock bottom rates, bonds are out of favour.

“Rates have been low for so long, people have exchanged bonds for more aggressive products,” he says. “Fixed income vehicles are there for defense, but many people are trying to play offence with them in that part of their portfolio.”

In an interview, Mr. Bradley offered his recipe for investment success, talked about common investing mistakes and the importance of an investment plan. He also believes that short term events driven by news of the day and politics may grab headlines, but have little lasting impact on your investment returns.

How should investors view the outlook?

Markets are always uncertain, though often, what people think about as uncertainties are things that have limited impact. The hottest button with our clients is US politics, but it’s very hard to find a long term correlation between politics and the stock market.

U.S. election night 2016 was just a few months after the Brexit vote. If you’d asked people what would happen over the next three years, almost nobody would have said three years of surging markets.

What’s on your clients’ minds?

They wonder about the next recession. We worry too, but the problem with recessions is predicting them. We think to go away and hide in the face of this uncertainty would be a mistake. We think stocks are the place to be.

So what should investors do?

Many Canadians have portfolios they think are diversified, but aren’t. I’ve seen too many people go all in on high yield [bonds], dividend stocks or preferred shares. They are not good diversifiers in bad times. Rates are low, but you still want government bonds, some high quality corporates and you might get adventurous with some high yield bonds.

If you can own a stock and can live with the fact that it’s going to get hurt in a recession, that’s fine. But we both know when things hit the fan, people aren’t that rational. That’s why bonds are there in your portfolio.

So what should investors do?

It sounds obvious, but they should diversify across economies, across currencies and industries. I gave a talk recently to an investment group and told them you’re not diversified if you own Canadian banks, utilities, telcos and a few REITs. A fellow in the audience got really worked up about that.

But what you have there is exposure to the Canadian economy, highly linked to interest rates. If rates go up, all those stocks will behave very poorly.

What do you see in 2020?
I have no idea. Nobody knows. We project out five years and think that’s useful. Our projection for five years on the fixed income side is yields between and 1 per cent and 3 per cent. We think 3 per cent would be pretty heroic. On the stock side, we are saying 5 to 7 per cent which is below the long term average.

What’s the most common investing mistake you see?

People get caught up in short term issues and want to react. So they forget about the foundation. The foundation is have a plan that has an asset mix and stick to it. If you’re 30 years old, it should probably be all equities. If you’re 55, it’s probably balanced.

What’s been your most important lesson?

The value of time and compounding. It’s very tempting to go short term and as a manager there are many pressures to do that. It’s much better to look at a business and ask: “Do I want to own it for a long time?” If the answer is yes, you will probably make money.