One important component of a solid Financial and Investment Plan is what I call the “opportunity mindset”. Over time Markets move higher, and from time-to-time they drop. You may have heard the old saying - the Market goes up like an escalator and down like an elevator. If you are an experienced investor you have lived this more than once!

 

This is where the opportunity lies. When the markets sell off, we see stocks (and even Fixed Income, such as Corporate Bonds and Preferred Shares) available at prices that seem too good to be true.

 

For me the opportunity mindset means to be ready and willing to sell one thing (even if it is down) to buy something else that looks “too good to be true”. In March 2020, I found opportunity in Energy Stocks, Real Estate Investment Trusts, Small Cap Stocks and Preferred Shares.

 

These things don’t always rebound overnight and sometimes these opportunities go down before they go up. For example, Energy Stocks and Preferred Shares had underperformed for years and looked very cheap (at least to me) in late 2019.   Despite being down already, they both fell significantly in February and March 2020. The good news is they rebounded just as quickly, and both now trade at higher valuations than before the downturn.

 

One of the best ways to implement this strategy is to buy the whole sector through an ETF or specialized Mutual Fund. The reason for this is the structure of a sector ETF ensures it will survive (unless the ETF provider shuts it down). ETFs are baskets of the largest stocks in a sector. If the entire sector is dropping (such as US Homebuilders in 2008), the worst performing investments become smaller and smaller components of the basket. If an underlying company goes bankrupt (and usually sooner) the holding is removed from the basket. The result is the remaining stocks – the survivors – now have greater market share, will participate more fully in the eventual recovery of the sector and will drive the future performance of the basket.  

 

One final note - the opportunity mindset is one component of a full financial and investment plan. It is one piece of a much larger puzzle that includes a mix of safety, tactical investments and what I call a “buy, hold and don’t panic” approach. If you interested in hearing more about how to incorporate an opportunity mindset into your portfolio, please reach out to me directly at jeff.ker@rbc.com or by phone at 416.231.6528.