Don’t give up on equities in volatile times, says Barry Morrison of Aston Hill.
Instead, find income-yielding ones.
“The beauty of dividend stocks is that if the market isn’t going anywhere, you make the dividend yield,” he says. “If the market goes sideways or down you’re still getting income out of the security.”
REITs are great examples, he says. “They’ve been tremendous performers in the last three years, partly because they were so cheap in 2008 and 2009, they were sold off very severely in the market correction and then they got yields of 7% or 9%.”
Despite this performance, Morrison’s private clients still tell him they want to keep much of their portfolios in secure bonds. But he stresses the importance of achieving long-term yield, instead of worrying only about capital preservation.
“If you’re worried about a one-year correction, you’re giving up a lot of excess return over the long-term. You’ll have a very dull portfolio with short-term bonds, and your returns suffer. That’s the risk to me, not one-year volatility.”
And equities shouldn’t be disposed in haste. For instance, Morrison points out the same fund could have a different Morningstar quality rating depending on the period analyzed. If the period includes a bad year, the rating falls to three or four stars. “But if you used a 10-year basis on this fund it could be five stars.”
In fact, he says, “I don’t mind short-term volatility; it gives me a chance to buy things cheaper.”