Portfolio Strategy highlights: How we fared in 2012

It didn't take me long to fall back into old habits in 2012.

You'd think I would have learned not to keep highlighting the challenges investors will face when interest rates start to rise. I've been doing this since 2010 and rates today are pretty much as low as ever. But they'll move higher some day, and that's why I'm not going to categorize my column on bonds from last January as a complete miss in this annual accountability of the Portfolio Strategy column.

It was on Jan. 28 that I did a Q&A with Hank Cunningham, fixed income strategist at Odlum Brown, in which we agreed it made no sense for investors to be making bond funds as popular as they were. The big risk at the time was rising interest rates, which had been long expected but not yet seen. Rates didn't rise, but bond funds had only a so-so year. The most popular mutual funds in the category were up 2 to 3 per cent for the year through Dec. 19, while the S&P/TSX total return index (includes dividends) was up 6.1 per cent.

Looking ahead to 2013, the headline on a recent TD Economics report sums things up nicely: "Rates lower for longer as Canada struggles to make progress." TD sees the Bank of Canada's overnight rate staying at 1.0 per cent until the fourth quarter of next year. That suggests short-term interest rates will stay low. Longer rates could edge higher – TD forecasts the yield on the five-year Government of Canada bond will rise from current levels around 1.3 per cent to 1.9 per cent in a year's time. I'm leery of bond funds in 2013, but you know my track record on this. Read the Jan. 28 column on bonds.

On March 3, I reviewed an investing strategy called Dividend Deluxe that I developed back in 2007. The idea is to buy dividend growth stocks and hold them over the long term so that the yield on your initial investment keeps rising. It's a great concept because dividend growth over the years can help offset inflation by giving you more cash per quarter.

But as I found in updating the strategy, you have to be careful in monitoring your dividend growth stocks because they can run into problems. Take the big banks, for example. To varying degrees they had to curtail dividend increases as a result of the financial crisis, and they're just getting their momentum back. And then there's SNC-Lavalin, a dividend growth stalwart that fell about 20 per cent in a day in March after the firm announced an unexpected loss and an investigation into undocumented payments. One positive here is that dividend stocks of all types had a pretty good run in 2012. Don't expect this to be repeated every year. Read the Dividend Deluxe column.

On April 28, I looked into those yield-oriented dividend and balanced exchange-traded funds that are so popular right now. Readers had been complaining about getting part of their payouts in the form of a return of capital rather than dividends or bond interest. It turns out that it's tough to find an income-focused ETF with level monthly distributions that doesn't have a return of capital component in its distributions. Read the column on income ETFs.

On May 12 and 19, I urged investors to consider investing outside Canada. Part one of the argument was based on the constraints the Canadian stock market operates under as a result of its near 45-per-cent skew to resource stocks. With the global economy struggling for traction, investors haven't been as excited as they used to be about energy and mining stocks.

Part two looked at how the sectors powering the U.S. market, technology and health care, were inconsequentially small in Canada, particularly after the decline of Research In Motion stock. Late in the year, the Nasdaq, S&P 500 and Dow Jones industrial average had all at least doubled the return of the S&P/TSX composite index. Unless global economic growth revives in 2013, there's no reason to think Canada can regain its one-time supremacy versus the U.S. market. Market upsets caused by the "fiscal cliff" negotiations reflect political discord, not underlying financial or economic fundamentals. Read the column about buying into the U.S. market.

I surveyed a variety of money managers for my June 9 column to find out what their assumptions were for investment returns in the years ahead. The 10-year annualized return projections for a portfolio 60-40 weighted to stocks and bonds, respectively, were mainly in the 6-per-cent range, before fees. Looking ahead to 2013, keep your return projections reasonable and mind the impact fees are having on your results. Don't allow any double-digit return projections to creep into your analysis. Read the column about return assumptions.

On Sept. 1, I wrote about a theme that continues to be relevant: The tendency of many investors to value safety above all. You can avoid stock market stress by investing safely, but can you reach your financial goals? Here's a guideline offered by Bill Horton, chief investment officer at MD Physician Services, about who should avoid stocks. "If our clients have less than a three-year time horizon, we say, don't invest in equities." Read the column on taking too little risk.

On Oct. 13, I anticipated the boom in real estate investment trusts by a month and a half in a column that concluded REITs still made sense for income-seeking investors, even after strong price increases in recent years. REITs suddenly shot to prominence in early December as a consortium led by a private equity firm made a bid for Primaris REIT, and Loblaw Cos. announced plans to create a REIT from its real estate holdings.

It's interesting to see a burst of activity in commercial real estate as the residential market cools. As noted in the Oct. 13 column, REITs today are arguably in a sweet spot of low rates and modest economic growth. Read the column on REITs.

On Nov. 3, I returned to the theme of investors hoarding money in do-nothing cash. Moshe Milevsky, finance professor at York University's Schulich School of Business, offered this no-nonsense take on the subject: "Every dollar in cash is a waste." For those who aren't budging from cash, the column offered a few suggestions on ways to maximize returns. Among them were investment savings accounts that can be bought and sold like mutual funds and offer yields around 1.25 per cent. Read the column on cash.

Topics on my to-do list for 2013: The argument for not investing in dividend stocks, the dollars-and-cents cost of fee-only financial advice and best bond ETFs for a rising rate world. If there's anything you'd like to have me write about, drop me a note at rcarrick@globeandmail.com.

Rising Rates

Invest Abroad

Dividend Growth

My March 3 column looked at an investing strategy called Dividend Deluxe, where you buy a dividend growth stock and allow rising dividend payments over the years to push up the yield on your initial investment. Here's the list of the Top 20 dividend growers to Dec. 31, 2011, with data on recent share price performance to Dec. 19. As you can see, it was a good to great year for most dividend growth stocks.

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