Consider a weighted-average strategy

Hey there, time traveller!
This article was published 11/10/2023 (770 days ago), so information in it may no longer be current.

Dear ATML readers,

I have received so many emails about what to invest in, how to invest, and what to ask advisers that I want to give you a low-risk investment strategy and discuss what you can expect in the markets as we move through the last quarter of the year.

Investors who feel like they are facing uncertainties in the market often switch their portfolios to a weighted-average strategy, which can be used to evaluate the performance of your stock portfolio. To calculate the true volume-weighted average (VWA), you need to calculate the financial investment weight and return. This is not something most investors will want to do, so instead here is a structure that can mimic this strategy and protect your investments during market volatility.

Selloffs in the market tend to raise the anxiety level of the average investor, reigniting fears of a severe and prolonged price decline. In reality, selloffs are a healthy part of the stock market since, after a dramatic price pullback, comes a recovery which usually morphs into a higher high than economists normally would have predicted. That said, when investors are forced to contend with volatile markets it is always recommended to use a weighted-average investment approach.

This investment strategy combines high-quality dividend payers and high-quality growth names equally and can be used in really any type of environment; especially given the current era of high inflation and interest rate hikes. A weighted-average strategy typically outperforms during volatile periods and limits losses during market declines, but it also provides one more thing — an attractive longer-term risk-and-return profile relative to the overall market.

Here’s how to approach this with your adviser — equity investments should be used with high-quality, dividend-paying stocks on the “defensive” side of the portfolio and then high-quality growth exposure stocks on the “aggressive” side of your portfolio. One of the most attractive attributes of this strategy, from the perspective of historical performance, is the ability to limit losses during market declines while also participating in the upside during periods of market strength.

Also, a word to the wise: September has typically been the worst month for U.S. stocks from a performance standpoint. with the S&P500 logging an average loss of 0.6 per cent going back to 1945. Do not be surprised if your portfolio struggles a little in the last quarter. Third-quarter results tend to exhibit weaker price returns historically. Instead, think of this as a “market sale” and a good time to buy high-quality stocks at a cheaper price. Top up your RRSP or TFSA. Late November and the month of December are typically the best times of the year for price performance and historically average gains of 1 to 1.6 per centare usually seen during the last few weeks of the year.