Adjust your portfolio for the times

Many people are suffering from investor shell-shock as a result of the long bear market, and they’re wondering what to do about the future. Here’s an example of the kinds of questions I’ve been receiving lately in my e-mail box.

“My wife and I are facing a predicament which I’m sure some of your subscribers are experiencing or will face in the future. This challenge is this: what options does one have when one has a large sum of money ($330,000 in our case) to invest while ensuring maximum growth for future use during retirement (my wife is currently 45 years of age). Is there an optimal mix you would recommend?

We’re determined to minimize any risks, but we also are looking for maximum growth. Given the state of the economy, I’m certain that other people are in similar circumstances. Any suggestions would be greatly appreciated.” – M. & F.G.

Unfortunately, there is no pat answer to this dilemma. The writer says he wants “maximum growth” but at the same time he and his wife wish “to minimize any risks”. The two goals are not compatible. One of the fundamentals of investing is that risk and return have direct relationship. The greater the return potential, the greater the risk under normal circumstances. So the first step is to decide your number one priority. Is it to maximum returns or to minimize risk?

The structure of your portfolio is the key
Most people will say they want to balance the two, and that’s a perfectly acceptable approach. But it means structuring a portfolio in such a way that you won’t experience top-level gains when markets are booming. Of course, when markets are sour you won’t be exposed to huge losses either.

A basic balanced portfolio would look something like this:

  • Cash assets: 10 per cent
  • Income assets: 40 per cent
  • Growth assets (equities): 50 per cent

However, there can be a lot of variations within each asset class.

Next page: Adding growth potential

Adding growth potential
For example, if you want to add growth potential to the income section of the portfolio, you may include income trusts (or funds that invest in them) in the mix. If you want to reduce the risk in the growth section, emphasize conservative stocks or value-oriented mutual funds.

Here’s an example of a portfolio that would offer decent growth potential with moderate risk exposure.

  • No-load mortgage mutual funds: 10 per cent. Use one of the bank mortgage funds instead of a money market fund for the cash position at this time. The money funds are yielding almost nothing. Mortgage funds provide a better return for only a modest amount of additional risk.
  • REITs: 10 per cent. The yields are very good and there is modest growth potential. The major risk is a decline in the commercial real estate market.
  • Other income trusts: 10 per cent. Risk is higher but yields are good. Alternatively, choose an income trusts mutual fund for broad diversification.

  • Government bonds: 10 per cent. The yields are low, but the safety is excellent. Stagger the maturity dates. Another option is to use the iG5 and iG10 exchange-traded funds that are based on Government of Canada five and 10-year bonds.
  • Foreign bond funds: 10 per cent. You should have some currency diversification in your portfolio to protect against further devaluation of the loonie.
  • Canadian stocks: 25 per cent. Focus on lower-risk blue-chips that pay dividends. Some examples: Brascan (BNN.A), TransCanada PipeLines (TRP), Royal Bank (RY), Sun Life (SLC), Manulife (MFC), Enbridge (ENB), CN Rail (CN), Loblaw Companies (L), and Canadian Utilities (CU). Alternatively, choose a conservatively-managed equity fund like Mackenzie Ivy Canadian or PH&N Dividend Income.
  • Foreign stocks: 25 per cent. Again, blue-chip dividend stocks are the best choice, such as Johnson & Johnson (JNJ) and Wal-Mart (WMT). Or choose a low-risk foreign stock fund, such as Mackenzie Ivy Foreign Equity or Trimark Fund.
  • Investors seeking greater return potential can reduce the income portion and add more growth stocks or mutual funds to the mix.

    To tilt this portfolio more towards the safety side, reduce the growth assets to the 30-40 per cent range and add more government bonds to the income mix.

    However you approach it, have a plan and stick with it. Discipline in investing has never been more important.

    This article originally appeared in the Internet Wealth Builder, a weekly e-mail investment newsletter that features some of Canada’s top financial experts. For membership information: