When buy and hold is no option

February 01, 2009
ELLEN ROSEMAN

"Buy and hold for the long term" is a formula, a mantra, a way of thinking embraced by the mainstream investment industry.

In my last column (Jan. 18) in this series, I talked about why the buy and hold strategy has become so popular with investment advisers.

Advisers are reluctant to make guesses about where the stock market is going. They aren't trained to be prognosticators.

Clients miss out on gains if advisers suggest getting out of stocks too early. Clients also miss out on gains if advisers suggest staying in cash after stocks rebound.

Market timing can be costly. Clients pay commissions, deferred sales charges on mutual funds and capital gains taxes (outside a registered plan) to sell stocks and buy them back later.
Clients who hold only cash and guaranteed investments may feel they don't need an adviser. They can manage such a portfolio on their own.

So, what are the alternatives to buy and hold?

You can look for an investment adviser that uses strategies that allow you to make money when stock markets go down.

For example, you can buy put options on specific stocks or stock market indexes (such as the TSX/S&P composite index).

You can also buy the "bear plus" exchange-traded funds, which allow making leveraged bets against stock indexes or sectors such as gold, oil, financials or grains.

"A lot of people use our products hoping they lose money," says Howard Atkinson, president of BetaPro Management, which offers 28 bull and bear funds.

"They're long on the market, but they sleep better knowing they don't have the same downside."

Sixty per cent of buyers are institutions, such as mutual fund and hedge fund managers, 25 per cent are investment advisers and 15 per cent are do-it-yourself investors.

Investment advisers who use them tend to be discretionary portfolio managers. They're authorized to trade without consulting clients in advance. This is important because bear plus ETFs must be watched carefully. They're not a buy and hold product.

"Our average hold period is quite short," Atkinson adds. "It's four days." You can also get your investment portfolio analyzed by an independent firm that doesn't sell investments.

Second Opinion Investor Services, based in Toronto, charges about $2,000 to analyze portfolios. It also helps people find an appropriate investment adviser for their needs.

"Buy and hold is a platitude that is outdated," says Mike Macdonald, an investment portfolio consultant with the firm.

"Everything and everybody needs to be monitored regularly because it is often an investor's life savings and future lifestyle that is at risk.

"Buy and hold is like an airplane's autopilot. It works great when everything is going smoothly.

"Then, birds fly into an airplane's engine and the real value of a live pilot is apparent.

"Unfortunately for investors, most advisers were on autopilot and there was no heroic landing."

The buy and hold mantra is a fairly recent development, says Warren MacKenzie, who started Second Opinion. You didn't hear about the wisdom of sticking with stocks during the long bear market that lasted from 1968 until 1982.

"And picture the poor Japanese investor who retired in 1989 when the Nikkei index was at about 40,000," he says.

"After 20 years, this buy and hold investor has seen his portfolio decline by about 75 per cent, before taking inflation into account."

Next week, we'll look at how to know if your portfolio is too risky and how to file a complaint.

Natural gas relief by 2010: report

Friday » January 30 » 2009

Natural gas relief by 2010: report

Dina O'Meara
Calgary Herald


North American natural gas markets are expected to improve by 2010 as storage surpluses get drawn down and demand makes a slow recovery along with the economy, according to a new energy overview.

Peters&Co. predicts natural gas prices will remain muted until the end of the year as the United States economy struggles to pull itself out of a recession and fuel inventories fall.

"The price of natural gas will likely remain under pressure until we see a material change in U. S. domestic supply or demand," the energy brokerage said in Tuesday's report.

After hitting a high of $13.58 US last July, natural gas futures have averaged $5.37 US per million British thermal units year-to-date, with only the December contract prices at or above $6 per mmBTU.

Spot deals at the benchmark AECO-Chubarearound$5.69 per thousand cubic feet, with summer pricing at $5.73 per mcf, and 2009-10 winter pricing at $7.44 per mcf.

The energy investment broker-age house forecast a 1.125 trillion cubic foot drop in natural gas demand between January and November this year, with a 625 billion cubic foot supply decrease, driven by poor economics as industry and producers cut back.

However, as the economy revives and industrial demand revs up again, prices should start shifting upward, the report stated.

"While spot natural gas prices are currently depressed and will likely remain so for the remainder of the winter, there is some hope that equilibrium between supply and demand will begin to develop over the summer with our forecast for supply declines to catch up with demand shortfalls by the beginning of the 2009-10 withdrawal season," according to the report.

Canadian production is expected to fall by 700 million cubic feet this year and another 400 mmcf in 2010. The decrease will be driven by natural decline rates, around 21 per cent a year, steep initial production rate drops in the 60 per cent range, and a drop in new wells drilled, Peters &Co. said.

The number of new wells in the U. S. are forecast to fall about 15 per cent from current levels --already down 23 per cent from last summer--on poor pricing and tight budgets. Based on those numbers, supply could fall by around 2.5 bcf per day by yearend 2009, or 370 bcf, January to October.

The wild card in the equation could be the number of new wells that have been drilled but not completed and tied into a pipeline system this year.

A backlog of wells were a strong offset to Canadian production de-clines over the past two years, mitigating the pace of supply contraction.

"If the same situation exists in the U. S. the pace at which sup-ply declines could obviously be tempered," the report said. "In addition, in periods of low prices, operators generally revert to more recompletion activity in existing well bores, which could also bolster supply."

Production in the U. S. rose about seven per cent last year, while industrial demand, the high-est consumer of natural gas, fell. On this side of the border, production fell on natural declines and a drop in drilling.

Canadian storage levels currently are about two per cent lower than last year at the same time, affected by declining production, with U. S. storage down one per cent from last year. Withdrawals this winter are about 852 bcf compared with one trillion cubic feet last year.



© The Calgary Herald 2009