There are four main areas of risk that can affect your investments, but are you aware of all of them? And if so, is your stock portfolio prepared to meet the unique financial challenges the rest of 2019 could bring?
Let’s review four potentially critical scenarios that could have devastating effects on a casually managed basket of stocks, and see what can be done to ensure a TSX stock portfolio survives in a rapidly changing economic environment.
Capital loss and volatility
If one’s assets depreciate in value, the resulting loss of capital will eat into the overall value of one’s portfolio. However, while it may seem counterintuitive to hold onto devalued assets, a long-term investor should remember that there was a reason why the market favoured those particular stocks and to have faith that the market will eventually recover.
The market can go up, and it can also go down. While positive momentum can mean that it’s time to celebrate, a market correction is a real threat in today’s climate of economic uncertainty, and one that could pulverize your riskier investments. From the ongoing trade war between Canada’s two greatest trading partners to the looming transatlantic spectre of Brexit, a market correction could wipe a fortune off the stock markets in the blink of an eye.
Liquidity and shortfall
Risk from low liquidity can mean “game over” when it comes to stocks and comes from being overly exposed to assets that can’t be bought or sold quickly enough. Investors should always have room to maneuver should their assets lose value or in the event that funds need to be redirected quickly.
When one begins a new portfolio of assets, an investment goal is usually set. If these returns are not met, one’s portfolio will essentially fall short of its owner’s financial aspirations. For instance, when buying dividend stocks, it’s crucial to be sure that a company’s distribution is safe, well covered by cash flows, and is backed up with a strong track record of reliable payments.
With a solid track record and one of the most stable dividend payers on the TSX, Fortis (TSX:FTS)(NYSE:FTS) has its downsides but is generally safe based on the above criteria. A 3.24% yield is acceptable for a low-volatility, long-term investment, while a history of stable payments makes for a stock to retire on.
Downsides to be aware of centre on the stock’s outlook and risk from debt. Though Fortis has a record of consistent earnings growth, the energy giant’s balance sheet is somewhat marred by a high debt level comparative to net value.
The bottom line
Most pundits will tell you that Fortis is one of the safest stocks on the TSX, but can it withstand some or all of the above threats to your TSX investment portfolio? As with any holdings, the most important element is context.
Investors need to weigh up how exposed they are to any one industry and ensure that they hold other asset types to spread the risk inherent in their portfolios.
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Fool contributor Victoria Hetherington has no position in any of the stocks mentioned.