As we prepare for roast beast dinner down in Whoville, it’s time to consider the Hot Potato as a side dish.
When it comes to investing, the Hot Potato is a momentum-based twist on the regular Couch Potato. You can read all about it here.
But you’re probably already familiar with the Global Couch Potato portfolio. It favours low-cost index funds (or exchange traded funds) and holds an equal amount of Canadian bonds, Canadian stocks, U.S. stocks, and international stocks. It is a good option for buy-and-hold investors because it only has to be occasionally rebalanced to make sure it still has an equal amount of each index.
The Global Hot Potato is different. It picks from the four indexes used by the Global Couch Potato but invests all of its money in the single index that has performed the best over the prior 12 months. For instance, it was invested entirely in U.S. stocks in 2015 and for much of 2016. But it recently moved into Canadian stocks and nothing else. It represents a much spicier offering.
I updated the return data for the portfolios and you can examine the results in the table below for periods ending November 30, 2016. The figures assume monthly rebalancing and do not include trading frictions (fees, commissions, taxes, etc.).
|Couch Potato Returns|
|Compound Annual Growth Rate|
|Period||Global Hot Potato||Global Couch Potato||Difference (pp)|
|1 Year||7.9%||6.1%||+ 1.8|
|3 Year||17.3%||8.9%||+ 8.4|
|5 Year||15.7%||11.0%||+ 4.7|
|10 Year||10.2%||5.5%||+ 4.7|
|20 Year||14.0%||6.6%||+ 7.4|
|30 Year||14.4%||8.4%||+ 6.0|
As you can see, the Global Hot Potato portfolio is still doing quite well. But it is important to point out that it can’t be expected to outperform the Global Couch Potato portfolio all of the time. There may well be long periods when it doesn’t perform well. Similarly, it won’t outperform each of its constituent indexes all of the time.
In addition, be sure to remember the caveat from the original article because the Hot Potato portfolio probably isn’t the best option for most investors.
The Hot Potato approach isn’t for everyone and should only be attempted by aggressive, seasoned investors. New investors should stick with the more conventional Couch Potato method, which encourages long holding periods. As always, for the best outcome, know your inner investor. Some people can handle a little heat—or a great deal of it. Others can’t stand even a touch of pepper. Pick the portfolio that’s right for you because your piece of mind will depend on it.
Safer Canadian Dogs
Investors following the Dogs of the Dow strategy want to buy the 10 highest yielding stocks in the Dow Jones Industrial Average (DJIA), hold them for a year, and then move into the new list of top yielders.
The Dogs of the TSX works the same way but swaps the DJIA for the S&P/TSX 60, which contains 60 of the largest stocks in Canada.
My safer variant of the Dogs of the TSX tracks the 10 stocks in the index with the highest dividend yields provided they also pass a series of safety tests, such as having positive earnings. The idea is to weed out companies that might cut their dividends in the near term. Just be warned, it’s a task that’s easier said than done.
Here’s the updated Safer Dogs of the TSX, representing the top yielders as of December 12. The list is a good starting point for those who want to put some money to work this week. Just keep in mind, the idea is to hold the stocks for at least a year after purchase – barring some calamity.
|Name||Price||P/B||P/E||Earnings Yield||Dividend Yield|
|National Bank (NA)||$54.62||1.92||16.5||6.06%||4.10%|
|Bank of Nova Scotia (BNS)||$76.55||1.76||13.18||7.59%||3.87%|
|Royal Bank (RY)||$90.30||2.08||13.28||7.53%||3.68%|
|Bank of Montreal (BMO)||$95.96||1.61||13.81||7.24%||3.67%|
Source: Bloomberg, December 12, 2016
Price: Closing price per share
P/B: Price to Book Value Ratio
P/E: Price to Earnings Ratio
Earnings Yield: Earnings divided by Price, expressed as a percentage
Dividend Yield: Expected-Annual-Dividend divided by Price, expressed as a percentage
As always, do your due diligence before buying any stock, including those featured here. Make sure its situation hasn’t changed in some important way, read the latest press releases and regulatory filings and take special care with stocks that trade infrequently. Remember, stocks can be risky. So, be careful out there. (Norm may own shares of some, or all, of the stocks mentioned here.)