Balance your portfolio for these times
During the boom times of the 1990s (how long ago they seem now), many investors allowed greed to overcome prudence and tilted their portfolios heavily towards equities. I am still receiving e-mails from people who are 8o to 100 per cent in stocks, some of them elderly, who are wondering what to do.
I have always been an advocate of balanced investing. The precise formula for portfolio allocation is a decision for each individual. Certainly we all know-or should know-that the older you are, the less risk you should assume.
But even younger people should take a reasonably balanced approach. It’s true that stocks outperform bonds over the long term, but that’s small consolation right now for the 35-year-old who has seen the value of his RRSP drop by 40 per cent or more in the past year.
Reassess your portfolio
Shortly before the terrorist attacks, I wrote about building a portfolio for troubled times. I wrote in the context of the deep bear market we were already in and the dimming prospects for an early recovery. Now, the comments are even more appropriate.
If you haven’t reassessed your portfolio balance in the light of the changesituation, it’s time to do so.
I stress this because many people have suffered such severe losses that they can’t bring themselves to open their financial statements. Paralysis is not going to help. You can’t change the past but you can certainly improve the prospects for the future.
Formula of 15, 45, 40
My personal asset allocation parameters at this time are 15 per cent cash, 45 per cent fixed income, and 40 per cent stocks. The cash and fixed-income securities are divided about 50-50 between Canadian and foreign currencies, with U.S. dollars dominating the latter.
As for the fixed-income side, I own a mix of U.S. dollar bank preferred shares, global bond funds, short-term bonds, some top-quality regular bond funds like PH&N Bond, and some high-yielding long-term strips that I acquired several years ago when rates were high.
Careful with equities
I am being very careful with my equity holdings, selling those that I don’t want to hold long term. My only recent purchase was Bombardier when it fell below $12.
Even a 40 per cent equity position may seem high in the current circumstances, especially given my pessimistic outlook about the short-term future. However, I have learned from long experience that no one can predict events, and that it is futile to try to time the market.
So my strategy is to choose stocks and equity funds that I am comfortable with going forward and not to fret about them. They will produce excellent returns in due course. In the meantime, the 60 per cent cash/fixed-income weighting is cushioning the portfolio against a disastrous loss.
Yes, you could go entirely to cash and be completely safe. But you’ll be on the outside looking in when the turnaround comes.
Adapted from the October 9th edition of the Internet Wealth Builder.