January 1, 2022
Happy New Year! Wishing you and your families health, love and happiness in 2022.
This past month I read, “The Psychology of Money” by Morgan Housel. The book has a lot of messages that resonated with me and I’ll be quoting some of them throughout this post. If you are looking for a book to read about finance and investing it’s an easy read.
Every December I do a thorough evaluation of our portfolio and assess potential opportunities. I use this process to help lay out a game plan for the following year. In this post, I’ll share some soundbites of my 2022 plan.
I’m grateful for the way the 2021 stock market treated us. I’m also humble with the luck that we had. As Quotel says:
“Keeping money requires the opposite of taking risks. It requires humility, and fear that what you’ve made can be taken away from you just as fast. It requires frugality and an acceptance that at least some of what you’ve made is attributable to luck, so past success can’t be relied upon to repeat indefinitely.”
The Game Plan:
1. I began first with a macro analysis by updating my GDP to DJI/S&P indices growth correlation chart to help determine my ideal 2022 trading range (below). More on this approach in April Stock Talk.
Assuming a GDP growth rate of 10.7% and 8.1% in 2021 and 2022 respectively (as per Statista), below is the trading range where I would feel comfortable buying all stocks on my buy list, regardless of where I had set stock-specific price targets. These ranges represent a drop of 17-30% in the DJI and a 28-40% drop in the S&P.
Quite sobering, and as a reminder, this is based on some historic, and some personal, observations so it might never happen (and I truly hope it doesn’t); however, it helps me avoid a feeling of overconfidence and to stay cautious about future decisions.
“Spreadsheets can model the historic frequency of big stock market declines but they can’t model the feeling of coming home, looking at your kids, and wondering if you’ve made a mistake that will impact their lives.” Morgan Housel
2. With that in mind, the next step was to determine the percentage of cash vs. equities I'd like to have. Needless to say, I’m favouring cash as I enter 2022. A very personal decision that depends on one's financial goals, investment horizon, sources of income, etc.
3. Next, I reviewed the stocks in my portfolio to identify which ones I’m ready to let go. For instance, I’ve decided that I didn’t want to own any pipeline stocks and sold my position in Pembina Pipeline (PPL). I did the same for West Fraser Timber (WFG), which is lumber and grew too fast in 2021. I also parted ways with AT&T (T) and Beyond Meat (BYND); both disappointed this past year and I don’t have a reason to believe the stocks will do better in 2022.
4. I then assessed every stock in my portfolio as well as some potential stocks. I reviewed their past 5 year performance, latest PE for the company vs. the industry, analysts expectations, earnings reports and dividend yield (when applicable).
Here is a short list of stocks I like and that I would buy if interest rates go up past ~1.5-2% or if the market falls within the aforementioned trading range. This portfolio is diversified and balanced between income and growth stocks.
5. As mentioned in last month’s post “Hindsight is 2021”, I’m planning to invest in ETF’s that track the main indexes. This technique has proven to be a cost efficient way to deliver sustainable growth and it's one that I haven't really used in the past so I reviewed options and here is a list of low cost ETF's that track the indexes.
“Every investor should pick a strategy that has the highest odds of successfully meeting their goals. And I think for most investors, dollar-cost averaging into a low-cost index fund will provide the highest odds of long-term success. That doesn’t mean index investing will always work. It doesn’t mean it’s for everyone. And it doesn’t mean active stock picking is doomed to fail. In general, this industry has become too entrenched on one side or the other—particularly those vehemently against active investing.” Morgan Housel
6. Last, I decided to continue to hold some ETF’s in areas which I believe have potential for growth but in industries where I don’t know enough to buy specific stocks.
“Good investing is not necessarily about making good decisions. It’s about consistently not screwing up.”
Morgan Housel
That’s it! Here, to a year of hopefully no major screw ups :)
Claudia Soler
* Disclaimer: The information contained within this blog is for informational purposes only and it is not intended as a recommendation of the securities highlighted or any particular investment strategy; nor should it be considered a solicitation to buy or sell any security. In addition, this information is not represented or warranted to be accurate, correct, complete or timely. the securities mentioned in this blog may not be suitable for all types of investors and the information contained in this blog does not constitute advice. Before acting on any information in this blog, readers should consider whether such an investment is suitable for their particular circumstances, perform their own due diligence, and if necessary, seek professional advice.