Brexit-proof your investment plan

Brexit-proof your investment plan

Build a wide margin of safety to ride the storm


News that the U.K. voted to leave the European Union crashed into the markets last week. Fear, uncertainty and doubt ruled the roost and stocks took a dive—at least for a few days.

But the world generates a copious amount of bad news and little of it should be acted on by investors. After all, the market was very glum in January and then jumped to new highs just a few weeks go. It’s part of an all too familiar pattern of panic followed by exuberance.

Rather than adopting emotional cues from the market, wise investors cast a skeptical eye toward the big news stories of the day because acting on them often leads to disappointment.

Instead, it is better to focus on your investment plan and process. After all, it is smart to develop a plan that can handle the market’s inevitable ups and downs.

For instance, couch potato investors keep an eye on their asset allocation, investment fees, taxes, and the ability of their funds to deliver what they promised. Market fluctuations are a sideshow that can be ignored because index investors know that a diversified low-cost portfolio will likely fare well over the long term.

Most of the time couch potato investors should live up to their name and simply sit on their sofas. The only thing they might think about doing during market panics is rebalancing their portfolios when their asset allocation gets out of whack.

Doing nothing while the world goes mad can be difficult, but index investors should try their darnedest to avoid being triggered into rash action by dire news. After all, panicking is one of the surest ways to ruin a good long-term investment strategy.

Mind you, those with the intestinal fortitude to stick with stocks through thick and thin can sometimes be forced out of the market at an inopportune time when they have to raise money quickly. It’s a big reason why smart investors keep generous rainy day funds to cover unexpected expenses. They also avoid the imprudent use of leverage and leave good sized buffers in their investment plans to handle unexpected expenses during downturns.

If you build a wide margin of safety into your investment plan, chances are you’ll succeed over the long term. On the other hand, those who live life on the edge run the risk of falling into the abyss at the first sign of trouble.

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 June 28. 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) $44.45 1.6 12.88 7.76% 4.95%
Power Corp (POW) $27.16 1.02 8.52 11.74% 4.93%
CIBC (CM) $100.48 1.93 10.99 9.10% 4.82%
Shaw (SJR.B) $24.92 2.25 14.32 6.98% 4.76%
BCE (BCE) $60.31 4.19 19.03 5.26% 4.53%
Bank of Nova Scotia (BNS) $63.77 1.57 11.39 8.78% 4.52%
TELUS (T) $41.50 3.21 18.44 5.42% 4.43%
Royal Bank of Canada (RY) $76.38 1.87 11.47 8.72% 4.24%
Bank of Montreal (BMO) $81.97 1.48 12.25 8.16% 4.20%
TD Bank (TD) $55.32 1.63 12.57 7.95% 3.98%

Source: Bloomberg, June 28, 2016

Price: Closing price per shareNotes

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.)

Required Reading

The Life of Riley Index