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Have you ever wondered how different asset classes perform from year to year? And more importantly, what are the ways you can benefit from this knowledge?
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Callan’s periodic table of investment returns gives you just that information. But also embedded in this chart are valuable lessons that can help you become a smarter investor in these three ways.
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You hear that you should diversify your investments, but that comes with a trade-off. Buying the best asset class can mean big returns. If you owned real estate investments in 2006, you would have seen your accounts grow 42% in just one year.
But that type of upside comes with the same kind of downside risk, and in 2008 you could have lost 48% of your account value if you only owned this investment. That’s why diversification is so important: Adding other asset classes like stocks or large-cap bonds can help even out your returns. In the following table, you can see how your returns are affected when you diversify.
There are some asset classes that over the long term have higher average annual rates of return than others. For example, over the long term, large-cap stocks have an average annual rate of return of about 10%, and bonds have an average annual rate of return of 6%. But this higher average annual return usually comes with increased volatility and is no guarantee that it will always be at the top.
Instead, each type of investment has its role in your portfolio. In bear markets, safer investments like bonds should outperform riskier holdings like stocks. And during bull markets, stocks should outperform bonds. As in 2008, when all equity-related asset classes had double-digit losses, the cash and bond categories had a positive performance.
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If something you own doesn’t do well for a year, that doesn’t mean it’s not a good investment. Also, if you get into the habit of exiting investments that haven’t performed well, you may find yourself chasing returns.
For example, small-cap stocks lost 11% of their value in 2018, but had more than a 25% gain the following year. And in 2017, emerging market stocks were the best performers, gaining 37% – but only after losing 15% two years earlier and being the worst performers. So selling these investments due to a year of losses would cause you to miss out on subsequent years of gains.
Not only should you avoid selling investments because they are not always profitable, but you should also consider buying more of your losers. When you rebalance your portfolio, you sell your assets that have done very well and buy those that have not done so well.
When a security or asset class is gaining, your natural instinct may be to buy more of it. But the better move for you might be to sell some of it, because your mix of stocks and bonds might be out of whack as a result. So if you start the year with an asset allocation model that is 50% stocks and 50% bonds, and stocks do really well – causing their allocation to reach 60% of your portfolio and your bonds to fall up to 40% – you may have a riskier investment mix than you want.
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Selling your bonds and buying more stocks because they are performing well will only give you a higher percentage of stocks. If the stock market continues to do well, so will your accounts, but if it crashes, you could lose more money than you bargained for.
In a year like 2008, you would have lost 15% of your account value if you had a 50/50 stock/bond portfolio. But if you had 70% stocks and 30% bonds, you’d lose 24%. Rebalancing your portfolio can help you stay spread out in a way that matches your risk tolerance.
Investing can seem complicated. And the more confusing it is, the scarier it can be. But you don’t have to and you don’t need to be an expert to succeed. Learning a few key lessons can go a long way in helping you achieve your goals.
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Invest better with The Motley Fool. Get stock recommendations, portfolio guidance and more from The Motley Fool’s premium services. In a recent article, I pointed out Tourmaline Oil Corp. (OTCPK: TRMLF ), a large-cap natural gas producer, as a preferred high-yield income idea due to its industry-leading cost structure, promising growth prospects and the possibility of near-term transportation headwinds.
After publishing this piece, I was asked to share my favorite Canadian natural gas producers outside of the large-cap and mid-cap categories. There are several northern natural gas producers that fall below $1 billion in market capitalization, such as Pipestone Energy Corp. (OTCPK:BKBEF) that I mentioned earlier; Kelt Exploration Ltd. (OTCPK:KELTF), Crew Energy Inc. (OTCQB:CWEGF), Kiwetinohk Energy Corp. (OTCPK:KWTEF), Coelacanth Energy Inc. (OTC:CEIEF) and Pine Cliff Energy Ltd. (OTCPK:PIFYF) ).
Pine Cliff Energy is a natural gas producer with operations in the western Canadian provinces of Alberta and Saskatchewan, as shown in Figure 1. During the period from 2013 to the third quarter of 2022, natural gas made up the majority of the company’s total volume production, ranging from 86.1% to 96.5%.
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Fig. 1. Pine Cliff Energy’s main areas of operation (left) and the natural gas markets it sells to (right) (Pine Cliff Energy)
Pine Cliff sells its natural gas in five markets, in part through the use of three proprietary pipelines, which allows optimization of physical deliveries based on market prices. Although the company primarily sells natural gas at prices comparable to Canada’s benchmark AECO, it was able to capture a premium in, for example, 2017-2019 and the third quarter of 2022, as shown in Figure 2. As a result, Pine Cliff has achieved an average premium of 9.0% since 2013.
Figure 2. Comparison of Pine Cliff’s realized natural gas price to Canadian benchmark AECO, post-hedge in $/GJ (top) and pre-hedge in percentage (bottom) (Pine Cliff and Laurentian Research based on data obtained from financial filings to company)
In December 2011, George Fink and Phil Hodge took control of Pine Cliff, with Fink as chairman and Hodge as CEO. Under their leadership, the company underwent multiple acquisitions from 2012 to 2015, resulting in rapid production growth, as seen in Figure 3, accompanied by a sharp rise in net debt, which reached over $140 million, as shown in Figure 4.
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Fig. 3. Pine Cliff Energy Production Profile, 2013 to Present (Laurentian Research based on data obtained from Seeking Alpha and Pine Cliff financial filings)
Fig. 4. Pine Cliff Energy’s net cash position (net debt) (Laurentian Research based on Seeking Alpha and Pine Cliff financial filings)
In response to persistent bear market conditions in the industry, Pine Cliff adopted a new strategy in 2016. Its assets have the lowest base rate decline among Canadian oil and gas producers, as shown in Figure 5. As a result, Pine Cliff was able to keep its capex low until mid-2021 without experiencing a significant decline in production, as seen in Figures 6 and 3. When natural gas finally recovered in the second half of 2021. , Pine Cliff increased its capital investment and began expanding production while paying down its debt and reaching zero balance sheet.
Fig. 6. Pine Cliff Energy Capital Expenditure (Laurentian Research based on data collected by Seeking Alpha and Pine Cliff)
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Since 2016, as production has declined, economies of scale have emerged, resulting in higher cash costs per unit of production, as shown in Figure 7. Operating netback and corporate netback per barrel of oil equivalent for Pine Cliff are primarily driven by prices of the raw materials, because depicted in Figure 8. Notably, like many other oil and gas producers, Pine Cliff’s free cash flow margin fluctuates less than its net margin. From 2013 through the third quarter of 2022, Pine Cliff suffered a cumulative loss of $148 million, but accumulated a total of $203 million in free cash flow. As of the third quarter of 2022, Pine Cliff’s tax pool stands at