Protect yourself! And take heart — these bad times are good times for investors


The recent financial crisis and the decimation of many once-healthy investment portfolios might actually be a good thing in the long run – if it means investors become more savvy and proactive about their financial futures.

Rob Carrick, a personal finance columnist for the Globe and Mail and author of a recent book on Canadian investments says it was the good times that have actually hurt many investors.

“Good times lead to complacency. You could almost throw a dart at investments and chances are you’d do just fine. But you need to prepare for the inevitable down turn,” says Carrick, author of Rob Carrick’s Guide to What’s Good Bad and Downright Awful in Canadian Investments Today released earlier this month.

“Most people, when they see their stock going up, think okay that’s great when actually they need to trim back their winners. So many people had more exposure than they thought they did, and that’s where they got caught. What should have been just 40% of their portfolio ended up being a major part of it, and they got wiped out in the downturn.”

His advice? Give up on the myth of “buy and hold” and instead commit to rebalancing – trim your winners and invest in your losers so that you are better protected against losses.

“It’s really the mantra of buy low and sell high. Most people only look at the upside but you really have to have the courage to take money off the table and position for what is inevitable, a downturn. Trim some gains to protect against losses.”

That advice might be hard to take, but consider your overall exposure should markets turn south or, as happened over the past year, crash completely.

“I saw a lot of really popular mutual funds lose 30-50% of their value, over a mere three to six months. I heard even experts with trembling voices, it was staggering,” says Carrick.

He embarked on his latest book prior to the crash but the fact of the crash actually helped him. “I was writing during the maximum stress the market could face, and it helped to examine how everything was doing and how it worked and performed at the worst moment. In the best moments anything goes,” said Carrick.

His book offers advice and names names – which companies or investments are worth it, which are not.

One of his foes is the marketing department of most mutual funds and investments, even banks, which push the image of the blissful, wealthy, indulgent retirement which creates a sense of panic to make more, more, more out of the portfolio.

“It’s a BS retirement dream. Most of us will have comfortable lives and will be able to take an OK trip now and then. Not everything has to be a holiday in Tuscany or skiing in the Alps,” says Carrick. He goes further to say “Freedom 55” is madness – who can work half their life to support the other half? He also resents the other marketing message, that boomers don’t invest enough with the overlay of judgment.

“The message is essentially that people are morally weak if they live in the here and now, that somehow their desire for lattes or a BMW means they can’t or won’t plan for the future,” says Carrick. “I just don’t buy that. I don’t want to let anyone off the hook but the bottom line is most people aren’t topping up their RSP contributions for one simple reason – they don’t have the money. Most people haven’t had a substantial pay increase in years but inflation is up, we all know everything is more expensive, there are kids, mortgages, expenses to cover and there’s just not enough money.”

And so he advises not to be seduced by the good times but to stay true to a gameplan that minimizes risk.

Risk takes many forms – currently he says most investors are extremely cautious and are holding sure-thing investments that simply won’t pay back. They may not lose money but they won’t make much either.

“A lot of investors are still wounded and traumatized and have parked their money in safe places, uncertain about what to do in the future,” says Carrick. “I suggest looking at returns in those super safe things and assess if that rate of return will help or hurt you. If you aren’t growing your money enough it might be strategically wise to take on a little more risk.”

Essentially it is balance, balance, balance – weighing your portfolio often and taking the hard decisions to ensure a high risk, vaulting stock or fund isn’t putting you in danger of being wiped out in a crash. Or, that a “safe” stock isn’t thwarting your ability to grow your money.

For some advice on how to cut through marketing jargon and some lessons in simple math which most investors willingly forget, check out Carrick’s book, Rob Carrick’s Guide to What’s Good Bad and Downright Awful in Canadian Investments Today.

Let’s cut to the chase. Here’s Carrick’s view on just a few utterly terrible investments. Read Six Crummy Mutual Funds that Make the Industry Look Bad