Lockheed Martin Nice Run, But What’s Left?

Summary:

The stock is up 123% over the past 5 years, excluding a juicy dividend

Dividend is growing at a 18.60% annualized rate for the past 5 years

After recent earrings, the stock is down. Is there anything left?

 

Dividend Stocks Rock Quick Stats

Sector: Industrial, Aerospace & Defense

5 Year Revenue Growth: 0.78%

5 Year EPS Growth: 8.00%

5 Year Dividend Growth: 18.60%

Current Dividend Yield: 3.16%

 

What Makes Lockheed Martin a Good Business?

Lockheed Martin (LMT) is the world’s largest defense contractor earning 61% of its sales from the US Department of Defense, 21% from other US government agencies and 18% from international clients. Heavy regulation, years of symbiosis with the US Defense and their know-how are three key elements protecting most of LMT’s business. Let’s just say you can’t start building military aircraft and missiles in your basement to compete with this defense behemoth.

The company recently designed the most advanced fighter aircraft (F-35), made important advances in light tactical vehicles and continues its work in space exploration. These are costly industries where not many competitors can compete.

 

How LMT fares vs My 7 Principles of Investing

We all have our methods for analyzing a company. Over the years of trading, I’ve gone through several iterations of stock research from various sources. This is how I came up with my 7 investing principles of dividend investing. The first four principles are directly linked to company metrics. Let’s take a closer look at them.

LMT

Principle #1: High dividend yield doesn’t equal high returns

The first principle is pretty much straight forward; if you look at a company with a high dividend yield, chances are the company won’t do very well in the future. The concept is fairly easy to understand; when interest rates are so low, investors are desperately looking for other sources of revenues. They then find dividend stocks! Since there is a strong demand for dividend stocks, the price increases and pushes the yield lower. If you can find companies that are paying a high yield today; it’s because they have little to no growth to offer. By looking at LMT, we can see the yield has considerably dropped from 4-5% to close to 3% these days.

LMT yield

 

 

 

 

 

Now consider the company increased its dividend by 18% annually during the last 5 years… quite impressive. This leads me to my second investing principle.

Principle#2: If there is one metric, it’s called dividend growth

In the past 5 years, the 1st quintile of dividend growers (companies that have the highest dividend growth rate) outperformed the others:

5 yr us returns growth

LMT is among the best dividend growers over the past five years and there is no coincidence that the stock price surged during the same period. Strong dividend growth is a sign management is confident about the company’s future. Over a short period of time however, it could be a simple way to lure investors. On the other hand, a company can’t keep up this strategy very long if it doesn’t generate strong sales and profits. There is a limit to playing with accounting standards and the limit is called time.

In the case of LMT, revenues didn’t go so well as the company faces a terrible problem; its client (80% of its business comes from the US govt) wants to cut their defence budget. This won’t help LMT in the years to come. While LMT will benefit from a small break since many contracts have been awarded for 2015 and 2016, the Gov’t still has to cut its budget before 2021 due to the sequestration law. We can clearly see that LMT did a remarkable job in increasing its earnings while cutting its costs, but this can’t last forever. Revenues will have to increase again to maintain a solid dividend growth.

Principle #3: A dividend payment today is good, a dividend guaranteed for the next ten years is better

In the light of LMT’s current sales growth problem, can we expect them to keep the dividend payment for the next ten years and beyond moving forward? The answer is yes. The defense business will always remain a strong need in the world and LMT will remain a key player. The payout ratio is under control at 50%. This is why I’m not concerned about the dividend payment for several years ahead.

However, I don’t expect an annualized 18% rise in the future either. A more reasonable increase in line with single digit earnings growth would be more realistic.

Principle #4: The Foundation of dividend growth stocks lies in its business model

I think it is safe to assume Lockheed Martin operates in a very strong moat. The resources and knowledge required to compete with LMT in the defense industry is very hard to acquire. While revenues might hit a speed bump in the upcoming years, the need for defence products will not stop. The business model is strong and LMT has recently improved its margin on the F-35 production.

I think LMT has a short term problem and this could affect the price you should buy the stock at. However, for a long term dividend portfolio, this could be a great core stock.

 

What Lockheed Martin Does With its Cash?

I’m under the impression management does everything to keep their investors happy and almost blinds them with major share repurchases and strong dividend growth. The business obviously requires tons of cash to be invested in R&D and new technology, but management still has $3.6 billion worth of shares approved for repurchase in the future. In their 2014 financial statement, management clearly stated their focus will be applied to increasing the dividend and to buy more shares over the next three years.

Note that even if LMT shows a heavy pension contribution in the 2014 financial reports ($2 billion), the business generated an additional $3.9 billion cash flow from operations. This is a true cash flow machine.

 

Should You Buy LMT at this Value?

Ah! This is the right question to ask; are you burning cash buying LMT at this price? Let’s take a look at the past 10 years history of price earnings ratio:

LMT PE Ratio

We have to understand LMT’s value was hurt mainly because of the sequestration bill passed after the 2008 crash. Defence budget was clearly hit by this law and put LMT revenues under pressure with little to no growth for ten years. We all know 10 years is bigger than the cosmic universe on the stock market. Nonetheless, LMT management caught investors’ attention with strong earnings growth doubled in conjunction with high dividend growth. As dividend investors, we probably overlooked the company revenues a bit to focus on our own.

In order to have a better understanding of the company’s value, I used the dividend discount model calculation spreadsheet with two stages. I used a 10% dividend increase for the next 10 years and dropped it down to 5% afterward. I think the company will continue to hike the dividend as high as it can until revenues come back up. They have a strong cash flow machine in hand and can play this game for a few more years. Since the business is relatively stable and the worst may have already happened to LMT, I use a 10% discount rate.

LMT Intrinsic ValueSource: Dividend Toolkit

The stock is currently trading near $190 and my fair value calculation stands at $170. In other words; the stock is trading at a 20% premium.

A premium paid for strong dividend growth in the past years, a strong economic moat where competitors won’t play very long against LMT and a premium paid for a dividend stocks showing a yield over 3%… still in this crazy market!

 

What I Would Do With LMT if I Had 10K in Hand

If I had a new 10K to invest in this company, I wouldn’t do it at the moment. I think the stock is overpriced and doesn’t show the growth potential that can lead to a higher price. However, I’m keeping my shares since they are part of my core portfolio where I expect to keep a company for 10 years and maybe more. LMT is definitely a good company to hold, but it’s just not the right time to buy it now…

 

Disclaimer: I hold LMT shares at the moment

Emotion Creates the Motion

Emotion Creates the Motion

Have you heard that somewhere? I know, the real official quote is the opposite (motion creates emotion) and it comes from Boiler Room:

 

 

It seems a bit simplistic; but I believe emotion creates the motion. I believe one can change his future if he’s fully invested in it. I’m pretty sure you have encountered this question during an interview;

If your friends or colleagues were here; how would they describe you?

Well… my friends, my family, my wife would qualify me in one word; passionate. In each and every single thing I do; I invest myself fully. If I’m not passionate about something, I just don’t do it. All of this because I believe emotion creates the motion.

 

Emotion

Why do you think emotion is so important? And why do you think I want to write about emotion when you are reading a dividend investing blog? What does emotion have to do with investing? Well, while we like thinking financial theory and rationale lead the investing world, emotions created by the stock market is the only law exercising true power.

We take pride in our investing returns.

We look forward receiving our next dividend payments.

We enjoy making new purchases.

We fall in love with a company.

We hope to reach financial freedom.

We get anxious when the market crashes.

We wonder if we bought the right stock after a bad quarter.

It’s all about emotion. And this is the same concept leading my latest project; the never ending thirst for freedom. When you find a way to channel your emotion towards the achievement of a single goal, this is where you create the motion.

 

Motion

Since January, I have been working day and night to keep my day job and grow my online business at the same time. Since January, I’ve increased my online income by 57%. I didn’t reach this milestone by fluke; I reached it because I’m fully invested. Because I think about my project each day, because I work on it every night, I generate enough emotion that there is a motion emerging out of it.

When I started my new schedule at the beginning of the year, it felt like pushing a huge rock to the top of a mountain. It was darn hard and it was moving very slowly. However, at one point, I feel like I’m getting to the top of the hill as the rock seems to roll by itself. It’s not at full speed yet, far from it, but I know the motion has been created. Now, the whole landscape is moving according to my vision.

I was able to convert my excitement for a new life, my thirst for freedom, my love for my family into a project. Into something that will change my life. I still have a long way to go before I can reach financial freedom, but the motion has started.

 

My Annual Meeting with my Partner

Over the past weekend, I spent my whole Sunday at a café to meet with my partner. We do this once a year to establish our goals, our vision for our online company. This year’s meeting was a bit different as we were quite excited about seeing me quit my job in exactly 12 months (shhh! Don’t tell my boss yet!). My plan is to leave for a 12 month sabbatical, but I don’t really intend to ever come back.

We determined we were on the right path to achieve this goal by growing our Dividend Stocks Rock investing platform. By making investors’ lives simpler, by providing them with research and portfolio models but also by providing members with direct access to the owner of the site (Me!), we are making a difference. This website can definitely become a real business and won’t be a one trick pony for long. We already have one person working full time on the site plus my partner and I totalling another 40 hours of work/week. Next year, I’ll become the second full time employee of this website and expect my partner to quit eventually joining the team full time.

 

You Work Too Much, You Should Rest

I was half amused, half insulted by my mother lately. She knows how we both work, my wife and I, to put the house up for sale (it’s finally up! Waiting for phone calls now!), working on our itinerary across America and on the websites. All she was able to say when she noticed I answered her email around 1am was:

You work too much, you should rest

This is exactly where the emotion comes into play; working 60-70 hours is not normal and probably not sane. But when you are passionate about something, you don’t really mind; it’s not exactly like working anyways. If you have a project, I’d tell you that you should work harder and never think about resting… anyway, if it really drives you, the emotion will create the motion!

 

Are you motivated enough to work long hours and fully invested yourself in something? I want to know what it is.

Stock Valuation – The Mystery of the Discounted Rate

stock valuation

After offering the Dividend Toolkit at a rebate for the whole month of April, I’ve had many questions about stock valuation, most precisely about the discount rate. The discount rate is used to determine a stock value through the Discounted Cash Flow (DCF) model and the Dividend Discount Model (DDM). The problem is that depending on which number you use as the discount rate, the stock you are analyzing could look like the perfect underdog just because you didn’t put a high enough discount rate.

 

What is the Discount Rate?

In very simple words, the discount rate is the % of return you seek as an investor. For example, if you invest $100 today and you expect to earn $10 in 12 months from this investment, your discount rate is 10%. This is the return you earn as an investor to compensate for the risk you take when you invest money. The discount rate is usually represented by the risk free rate (how much return you would get if you would invest in Government bonds for example) + a risk premium. In other words; the discount rate is how much you should earn for your investment since you take additional risk.

If you do your own research, financial theory will lead you tons of calculations to assess the right discount rate. You will eventually arrive at the concept of capital asset pricing model (CAPM) and the weighted average cost of capital (WACC). Unfortunately, at the end of several hours of research, you will come to the following (and shocking) conclusion:

Stock valuation comes from art and not science

The problem is often that a small difference in the discount rate will lead to a huge difference in the “fair” stock price assessment.

 

How to use the Discount Rate if it’s not reliable?

This is where the “art” meets the “science”. Financial theory will help you find all kinds of magical calculations. But if it was that easy, I’m pretty sure you would only have to pay a few bucks per month to get access to a stock value calculation service. The thing is that all stock valuation methods are linked to the future ability of the company to generate either cash flow, earnings or dividend payments.

For beginner investors, it is important to understand that using a single stock valuation method will lead to losing money on the stock market. The discount rate will help you using both the DCF and the DDM. In order to feel comfortable with my valuation, I use more than one discount rate.

 

9%, 10%, 11, 12%?

The discount rate I use will vary between 9% and 12%. The 9% and the 10% are used for strong companies. A company with a strong balance sheet and an amazing dividend growth track record such as Johnson & Johnson (JNJ) will merit a 9% discount rate. I use a smaller discount rate as the investment represents a smaller risk. JNJ is a leader in a mature market and shows a strong and well diversified portfolio of products.

On the other hand, if I’m looking at a company showing erratic fundamentals over the past 5 years such as Garmin (GRMN), I will use a 12% discount rate to reward me for additional risk in this investment. GRMN is in the middle of a technological business shift as personal navigation devices face strong competition from smartphones applications.

Then again, it’s not an easy task to determine which discount rate to use. But using various percentages depending on the risk of a company will give you a better idea of the stock valuation. The best way to make sure you are using the right numbers is probably to try more than one stock valuation method and compare them. I personally use three methods combined together. You can read about it here.

 

How much time should be spent on Stock Valuation?

I’m not a big fan of stock valuation to be honest. The reason is simple; my assumptions are as good as yours. Therefore, if you look at JNJ and use an 11% discount rate, you will find the stock way too expensive compared to me. Who’s right at that point? Only the future will tell us.

I use the calculation spreadsheet found in the Dividend Toolkit and I use my stock valuation method in three steps. However, I don’t spend many hours determining whether or not it is the perfect time to buy a stock. Once I determine the company shows strong fundamentals, a great dividend growth perspective and it fits into my portfolio asset allocation, I simply hit the buy button.

 

What about you, what do you use for discount rate?

 

Disclaimer: I hold shares of JNJ but do not hold shares of GRMN

 

Image credit retrieved from Pinterest

There are 3 Words in Dividend Growth

growing tree

I decided I didn’t have enough from the article I wrote last week about dividend reports. Last week, I knew I was opening a can of worm when I wrote that I don’t understand the importance of tracking my dividend income on a monthly basis. While the discussion was very interesting on this blog, I got crucified for blasphemy on Seeking Alpha when they republished my article (at least they thought it was good enough to be read! Hahaha!). Don’t worry, I’m not going to go back to this post to defend myself, I really don’t mind if some cranky individuals decided to go hard on me. I’m here to take the discussion further about what dividend growth investing is.

What I learned from last week’s post is that defining words you use is very important as we don’t all have the same definition of them. Then I thought about my own definition of dividend growth investing and I realized that my definition probably differs from most “classic” dividend investors’ ideas. Because “dividend growth” is written with three words…

 

Dividend

The first concept of dividend growth investing is obviously about the precious distribution companies pay their investors. The distribution can be paid monthly or the wait can be as long as yearly, but most stocks pay dividends on a quarterly basis.

Much empirical research has been done during the past 50 years and many of them conclude that dividend paying stocks will ultimately outperform the stock market over a long period of time. This makes total sense when you think about the basics; a dividend is distributed to shareholders only after the company had made a profit and paid its taxes. In fact, if the company has a better usage of the remaining monies, it may not even pay a dividend. By deduction, you can determine that dividend paying stocks must be very strong to post solid profits and generate enough cash flow so it can use some to reward shareholders at the same time as it continues to grow the business. It’s only common sense to think that once you found such company, you can expect it to outperform the overall market.

But intuition is not enough; you need something stronger to convince most people to make a move towards something as serious as an investing strategy. I could pull out ten research articles to show you that dividend investing is a strong investing philosophy, but I’ll share only my favorite graph produced by the Ned Davis Research about stock returns from December 31st 1971 to December 31st 2013:

S&P500 stocks returns

As you can see, the S&P 500 outperformed the non-dividend payers and the highest dividend yield paying stocks. However, regular dividend payers and dividend growers easily beat the S&P 500 returns.

By choosing dividend investing, you are not automatically guaranteed to beat the market or perform well. It all depends on your investment decisions. However, you are guaranteed to pick your fruit from the best basket. Small cap traders, options gurus and penny stock maniacs could do a lot better than dividend investing, but they can also lose everything in a heartbeat. It is less likely to happen with dividend investing.

The purple column on this chart is related to dividend growers and initiators. Therefore, choosing dividend paying stocks is a good strategy, but picking those which increase their dividend year after year is even better. This leads me to the second word of my dividend growth investing definition:

 

Related read:

How to build an equal payment monthly dividend portfolio

7 Dividend Investing Principles

My case against high dividend yield stocks

 

Dividend Growth

I always say that if there is 1 metric I would look at before buying a stock, it is its dividend growth rate. If there is one number you can take a look; check out the dividend growth. When a company is able to grow its dividend over a long periods of time, it implies the following:

A strong business model leading to;

Strong branding & market leadership leading to;

Increasing sale leading to;

Increasing profit leading to;

Increasing cash flow leading to;

Increasing dividends

But don’t take my word for it, take a look at Tetrem Capital’s research with Bloomberg data:

dividend debateSource: Dividend Debate

As you can see, the dividend growers are always the companies on top of the market. It’s even more important as they didn’t take the same hit the S&P500 took back in 2008 or during the techno bubble in 2000.

Then again, what does it take for a company to increase its dividend over the next 15, 20, 25 years? Solid profit growth. And how do you generate solid profit growth? With an amazing business model. If you take a look at the dividend aristocrats list, you will find that most companies in this list are companies with exceptional branding, leaders of their market and showing a competitive advantage that is almost untouchable.

I know many investors take a look at a company’s previous cash flow generation ability. As dividend investors, we usually prefer cash flow to earnings as the latter is an accounting number and has nothing to do with what lies in the business bank account. Since the dividend is taken directly from the bank account, cash flow is king. But you can avoid being so concerned about cash flow generation once you find a company with a perfect dividend growth tracking record. It implies that cash flow is generated within the company. This is why I like dividend growth so much; it makes investing so much simpler.

Unfortunately, it doesn’t mean you have to disregard other metrics or simply focus on dividend payment and dividend growth.

There is also a hidden trap in the dividend investing concept and this is where I think many investors forget about the forest behind the three.

I’m cherry picking here, but I want to show you that dividend growth is not everything. Take Sysco (SYY), a strong dividend aristocrat. This is a strong and diversified company increasing its dividend payment since the 70s. But over the past 10 years, the stock value barely moved leaving investors with the dividend growth and… nothing else.

SYY price change

This is why it is important not to forget about the third word in “dividend growth” which is… growth.

 

Related read:

How to build a double digit dividend growth portfolio

 

Growth

As a dividend investor, I don’t stop at the dividend payment (yield) or the dividend growth. I also look at the overall potential of the stock growth in the future. I’ve been criticized of not being a true “dividend investor”; I’ve even been called a “trader” because I focus on stock value appreciation. Just to make sure we are clear on something; a trader is an investor actively buying and selling stocks in his portfolio; I do about 4 trades per year.

Each and every single stock I buy must pay a dividend. This is my first search criteria. However, I’m not blinded by a juiced up dividend. The company must show general growth perspective. If it doesn’t, some day or another, the dividend growth will stop. This is why I focus on capital appreciation.

In order to manage properly my dividend portfolio, I’ve divided it into two different segments: The Core and The Growth part.

core growth

The core section is follows exactly the buy & hold dividend growth style. I pick companies I will likely hold forever. In the core section, I have the following holdings:

Apple (AAPL)

Coca-Cola (KO)

Walt Disney (DIS)

Johnson & Johnson (JNJ)

Telus (T.TO)

Walmart (WMT)

National Bank (NA.TO)

Lockheed Martin (LMT)

These are companies I want to keep and benefit from their strong dividend growth. This is my cushion, the foundation of my portfolio. However, some of these holdings won’t produce astonishing returns if you exclude the dividend. I’m thinking of Walmart for example, it evolves in a mature market and their margins are very small. This is why I also include a growth portion of my portfolio including the following holdings:

Black Diamond Group (BDI.TO)

Gluskin Sheff (GS.TO)

Helmerich & Payne (HP)

SNC Lavalin (SNC.TO)

As you can see, this is a smaller portion of my portfolio. The growth part is riskier and includes higher volatility. I bought BDI.TO during the oil turmoil; the stock is now up and keeps paying a very high dividend. I bought GS.TO hoping for a future merger/acquisition as there is a consolidation trend among the private wealth industry. HP was bought to benefit from the oil boom (before it collapsed), so far, it is my only negative holding in my whole portfolio. Finally, I bought SNC.TO recently to benefit of a recent stock price drop (due to fraud allegations).

These trades seems more like what a trader would do, but if you look closer at each of these companies, you will find solid business models and dividend being paid and increased regularly. I expect to hold these companies for an 18 – 24 month period until I can realize a quick capital gain.

Sometimes, a stock bought for the “growth” segment turns out to be a great pick and moves into the core portfolio. My most recent example is APPL. I bought the stock before the split, when it was trading around $440 (it went down to close to $400 if I remember correctly). Nothing was going well with AAPL, sales were down, competition was up; I thought it was the perfect time to buy it. Today, many problems have been resolved and AAPL continues to grow its “perfect” product ecosystem with Apple Pay and the iWatch. I now expect to hold AAPL for several years.

On the other hand, I recently sold MCD and BNS.TO because I was disappointed in their efforts to grow their businesses. They were both part of my core portfolio. As you can see, following your holdings closely is crucial. I have a simple selling rule that I always follow:

Sell a stock the minute it no longer shows the reasons you bought it in the first place.

Because the world is on the fast track ever evolving, because companies rise and die in a heartbeat, following your holdings on a quarterly basis helps you generate strong results. It is true that I’m selling stocks more often than regular dividend investors, but that’s probably because I see three words in Dividend Growth.

 

Related read:

My investing philosophy: Core & Growth portfolios

 

Disclaimer: I do not hold shares of SYY

Image credit

How to Handle the Currency Factor

currency factor

You may not know this, but I have a pretty diverse readership. Roughly 44% of my readers are Americans, 40% is Canadian and 6% coming from Europe. Over the past three years, there was a major concern all readers shared with me; the currency factor.

Each time there are important currency exchange movements; investors from one country see a big jump. Recently, both Canadians and Europeans got great deals if they bought US stocks back in 2011-2012. At that time, the greenback was undervalued due to very low interest rates and the fact the FED was printing money faster than I ate my Easter eggs. Fast forward a few years and the situation has now completely shifted; the US dollar is stronger than ever. Now, the question I keep getting from both sides;

Is there a way to benefit from the currency movements?

Oh! Don’t worry, you can keep reading, this is not some kind of twisted marketing post about forex services ;-)

 

What if you are on this side as the US dollar went up

If you are an American investor, the best thing you could do is to look for outside opportunities. I will agree with you; you currently show both the strongest economy and stock market. However, there is definitely a play to make in buying a few dividend stocks in Canada. There are three very interesting industries that pay dividends for US investors: Energy, Financial and Telecoms.

At the moment, my favorite picks would be among the energy sector as it was hit right, left and center over the past couple of years. This is a perfect time to buy great dividend payers at a low price (both in term of stock value and in dollar value). Here are a few ideas to start hunting:

 hunting ideasTo this list, I would also add Black Diamond Group (BDI) and Emera (EMA.TO).

 

In addition to the energy industry, I would definitely look at Canadian Banks if you look for a steady dividend payer. Banks are known in Canada to do two things: they are solid and increase their dividend each year. There isn’t much growth expected from financials this year, but the dividend is far from being at risk. My favorite picks in this sector are Royal Bank (RY.TO) and TD Bank (TD.TO) for their size and experience and National Bank (NA.TO) and Gluskin Sheff (GS.TO) for the fact they are smaller and linked to wealth management.

Finally, the latest sector that could be of interest is the telecom industry since they operate in an oligopoly. My favorite pick is definitely Telus (T.TO) as it earns more money per customer than any of its peers at the moment. BCE (BCE.TO) is also an interesting pick for those looking for a higher dividend.

Overall, buying Canadian dividend stocks is a good play considering the dollar can’t really go higher than this over the long haul. Over the next year, it could gain another 10%, but sooner or later, the oil price will bounce back for good and the Canadian dollar will go back to $0.85/USD. Plus, if you hold your Canadian holdings in a tax sheltered account, there are tax treaties preserving dividends from tax withholding rules (check with your accountant first).

 

What if you are on the other side

I must admit I get more emails from “the guys from the other side”. Being a Canadian, I was part of the group of investors who saw the potential back in 2012 and I’m laughing right now as my portfolio is showing very strong results. But now that the Canadian economy is going sideways and the US dollar is at its peak (or almost), what is left for Canadian investors?

Personally, if I was to receive a big check of 100K tomorrow morning to invest, I will still invest half of this amount in US stocks. It is true the currency might affect my portfolio over a short period of time, but the growth potential over the next 10, 15, 25 years is way more important in the USA than in Canada. The truth is that there is only so much movement a dollar can swing compared to another one. At one point, this movement will become meaningless compared to the investment return itself. I’ve put the Coca-Cola (KO) stock graph compared to the CAD value side by side to see if it really matters:

KO vs CAD

As you can see, the Canadian dollar lost 10% since 2006. Therefore, if a Canadian would have bought KO back in 2006, he would have made a total return of 96.92% + 10.20% (plus dividend).

Do you really think the same investor would have been crying if the Canadian dollar had gained 10% instead of losing it during the same period?

 

The real effect over the long haul

I once attended a portfolio managers’ conference and one attendee asked the following question:

Should I consider investing in a US dollar hedged mutual fund or in a mutual fund that is not hedged?

The portfolio manager simply smiles back and asks the investor:

What do you want to hedge your money from anyways?

His point was that over a very long period of time, the currency effect was minimal on a portfolio. I tend to agree with him. Over a 20 year period, the right investment will be worth twice, triple, four times your initial investment. During the same period of time, the currency rate will change maybe 10-20%? 20% over 20 years… it’s less than inflation…

I clearly understand that when you look at your statement quarter to quarter, the dollar will have an effect on the value of your portfolio. But if you look at it only each year or once every three years, you won’t see this impact anymore.

Once again; your asset allocation is more important than the timing or the currency rate you will invest in. Build a solid investment plan using solid investing principles and you will become a wealthy investor.

Disclaimer: I hold shares of BDI.TO, NA.TO, T.TO

Image credit (Pinterest)