Q: 1:10 PM 3/19/2018
Hello Peter
I would appreciate it if Peter could answer this question as he has years of experience as a fund manager and I would respect his considered opinion....
We have a large Blue Chip dividend-growth income portfolio of Canadian stocks. It currently has unrealized gains of about 25% and has a dividend yield of 4.6%. We run this equity portfolio like a private pension fund for ourselves.
We are quite aware that a major market "correction" or crash will come sometime in the next year or so and would like to position the equity part of our portfolio for that event. There are really only three options that we can see.
OPTION 1. Sell all our stocks and go to Treasury bills and 2 to 5 year Government Bonds, for a yield of about 2 to 2.5% in interest income. We would be giving up a 4.6% dividend income stream in exchange for a 2.5% interest income and lose the advantage of the dividend tax credit. Additionally we would be hit with a massive taxable capital gain pushing us well into the topmost tax bracket.
OPTION 2. Do Nothing. If during the crash our stocks dropped 50% in price it wouldn't matter as we would plan to neither sell nor buy any more shares up until and during the crash. If as a worst case scenario, dividends were cut by 50% on all our shares [most unlikely] then our dividend income yield would still be 2.3%, and with the Dividend tax credit would still beat the 2.5% interest income we would be getting if we had sold all our stocks and switched to short-term bonds and bills as in Option 1.
So if we choose Option 2 and ride out the market crash fully invested, then we are no worse off for income than choosing Option 1 and selling out and going to "cash", and we don't get hit with a massive capital gain tax bill.
OPTION 3. As in Option 2, sell no stocks in our Cash accounts but sell everything in our 2 RRIFs, and 2 TGIFs which together amount to about 10% of the overall portfolio. We could sell all the shares in them easily at any time at virtually no cost in our discount brokerage, park the money in GICs and no capital gains taxes would be payable at all. The proceeds would be ready for buying blue chip dividend-growth yielders when the time seemed right.
In simplest terms the object is to preserve capital as much as possible while at the same time allowing withdrawal of a reasonable predictable income.
What did Dividend Aristocrat type portfolio fund managers, or Pension Fund Managers Like Peter do in anticipation of the market correction in 2007 - stay invested, change asset allocations, become more defensive [how?], do sector rotation, adjusting allocations among the 11 TSX sectors - out of what and into what? Anything else?
If you, Peter were responsible as a portfolio fund manager for running our equity portfolio which is essentially a Canadian "Dividend Aristocrat" portfolio, how would you handle it in the years ahead considering the high probability of a major market correction/crash? Would you choose one of these options or would you have a different strategy?
Thank you.............Paul K
Hello Peter
I would appreciate it if Peter could answer this question as he has years of experience as a fund manager and I would respect his considered opinion....
We have a large Blue Chip dividend-growth income portfolio of Canadian stocks. It currently has unrealized gains of about 25% and has a dividend yield of 4.6%. We run this equity portfolio like a private pension fund for ourselves.
We are quite aware that a major market "correction" or crash will come sometime in the next year or so and would like to position the equity part of our portfolio for that event. There are really only three options that we can see.
OPTION 1. Sell all our stocks and go to Treasury bills and 2 to 5 year Government Bonds, for a yield of about 2 to 2.5% in interest income. We would be giving up a 4.6% dividend income stream in exchange for a 2.5% interest income and lose the advantage of the dividend tax credit. Additionally we would be hit with a massive taxable capital gain pushing us well into the topmost tax bracket.
OPTION 2. Do Nothing. If during the crash our stocks dropped 50% in price it wouldn't matter as we would plan to neither sell nor buy any more shares up until and during the crash. If as a worst case scenario, dividends were cut by 50% on all our shares [most unlikely] then our dividend income yield would still be 2.3%, and with the Dividend tax credit would still beat the 2.5% interest income we would be getting if we had sold all our stocks and switched to short-term bonds and bills as in Option 1.
So if we choose Option 2 and ride out the market crash fully invested, then we are no worse off for income than choosing Option 1 and selling out and going to "cash", and we don't get hit with a massive capital gain tax bill.
OPTION 3. As in Option 2, sell no stocks in our Cash accounts but sell everything in our 2 RRIFs, and 2 TGIFs which together amount to about 10% of the overall portfolio. We could sell all the shares in them easily at any time at virtually no cost in our discount brokerage, park the money in GICs and no capital gains taxes would be payable at all. The proceeds would be ready for buying blue chip dividend-growth yielders when the time seemed right.
In simplest terms the object is to preserve capital as much as possible while at the same time allowing withdrawal of a reasonable predictable income.
What did Dividend Aristocrat type portfolio fund managers, or Pension Fund Managers Like Peter do in anticipation of the market correction in 2007 - stay invested, change asset allocations, become more defensive [how?], do sector rotation, adjusting allocations among the 11 TSX sectors - out of what and into what? Anything else?
If you, Peter were responsible as a portfolio fund manager for running our equity portfolio which is essentially a Canadian "Dividend Aristocrat" portfolio, how would you handle it in the years ahead considering the high probability of a major market correction/crash? Would you choose one of these options or would you have a different strategy?
Thank you.............Paul K
