Where to take your portfolio next

January 23, 2008

Continued from Page 2…

T Dot from Towertown Canada writes: Many people hold mutual funds managed by financial professionals rather than self-administered RSP portfolios. So any individual initiatives are limited to switching fund portions and/or topping up. We keep faith with the fund managers who value their positions. What advice would you offer in light of recent events with regard to diversifying funds within an established portfolio? For example, is it advisable to shift a greater portion of energy investment to precious metals? Or is it better to maintain the status quo - a balanced portfolio?

Rob Carrick: Yo, T. Go balanced all the way. Big bets on sectors at what appears to be the beginning of a bear market are risky. The only fancy manoeuvring I'd be doing right now is trying to ratchet down the risk level by keeping funds in cash and ensuring you have some holdings in bonds. If you have good funds, they'll be managed by people who are capable of sifting through the bargains in the market right now and buying the right names and sectors. Leave the driving to them. Of course, this assumes you have good funds. By the way, there's no reason you can't hold some gold in a balanced portfolio, of course. A 5-per-cent portfolio weighting makes sense as a hedge against global economic uncertainty and further declines in the U.S. dollar.

Viktor O. Ledenyov from Ukraine writes: What strategies should Canadian investors employ to maximize the return on investment and minimize the risk posed by the expected high volatility in global capital markets in 2008?

Rob Carrick: Viktor, I doubt we'll get a question from further away than the Ukraine today. Thanks for tuning in. Minimizing risk is the most important investing theme for 2008, what with the stock markets showing definite signs of having their worst year in a long while. Canadian investors can accomplish this mission by keeping some of their portfolio holdings in cash and bonds, which should be a modestly profitable place to invest in 2008, and by diversifying their portfolios so they retain exposure to areas like energy, metals and the broad Canadian and global markets without too much concentration in any one area. Buying the shares of companies that are falling in price makes sense, but in moderation because the markets are headed lower before they rise again. No doubt, hedge funds are going to rise in popularity, just as they did in the last bear market because of their ability to short sell, or profit from declining share prices. It's not easy to pick a hedge fund — they're complex and stingy with information — but high-net worth investors may want to look into them.

Greg Ast from Nanoose Bay, B.C. writes: I am disappointed in the stock market, especially in the Canadian banks whose reputation was sterling in the 80s and 90s but who appear to have been sucked into the American market in the name of growth and been only too happy to behave in that marketplace in a way that they would never behave in Canada. So now the Canadian markets are heading in the same dirstion as the US - sharply down.

I think this sub prime mortgage fiasco is going to cause a lot of Canadian Boomers to rethink the stock market as a smart choice for their retirement savings.

Rob, how long is it going to take for the equity markets to regain the trust of the little guy?

Rob Carrick: Greg, I hear comments like yours every time the stock market takes a dive. And I wonder why. I mean, investing in stocks means taking the bad with the good. Over a long period, say 10 years or maybe even 5, the good outweighs the bad and you end up with an average annual return of 7 to 8 per cent, which is much better than you'd get from bonds or cash. Is there anything exceptional about the current market decline? No way. In fact, it's probably overdue after five straight great years for the markets. Now, you mention how you're disappointed with the banks. I know lots of people share this view. But what we've seen lately is just banks being banks. There is a tendency for banks, some of them anyway, to get in over their head when a new form of lending, borrowing or investing emerges. It's happened in the past with Canadian commercial real estate, tech, third world loans and, now U.S. mortgages. The important thing to remember is that the banks, like the overall markets, rise again and do well in the long term. My advice to the little guy: don't take market downturns personally.

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