Rebalance mutual funds

The numbers from the Investment Funds Institute of Canada for June and July 2002 made depressing reading.

Investors bailed out of mutual funds at the fastest rate in many years, withdrawing more than $2 billion during that period.

A lot of the money flowed from low-yield money market funds. But equity funds were hit hard as well.

Net redemptions in July from Canadian, U.S. and international stock funds totalled more than $600 million.

The August results were somewhat better. But redemptions still exceeded new sales, so the bleeding hasn’t stopped yet.

Typical for market
Of course, a massive bailout from stocks and mutual funds is typical in a late-stage bear market. It’s often interpreted as an indication that the bottom is near and a turnaround isn’t far off.

What usually happens is that those who sold at the nadir are left on the sidelines licking their wounds while the markets shift gears and start moving up at an unexpectedly fast rate.

That’s one reason why I’ve always advocated a balanced approach to fund investing. By spreading your assets, you reduce risk and therefore may be less inclinedo panic when things go badly.

Construct your portfolio
One way to achieve that is to construct a portfolio that suits your investment profile and stick to it. Over a year ago, I created a Balanced Portfolio model that readers could emulate.

It’s divided into two parts: a basic model and a current recommendation, which allows for adjustments up to five percentage points on either side of the base.

Recently, I revisited it to see how it had withstood the ravages of the bear market. Pretty well, it turns out.

Over the 12 months to July 31, the overall portfolio lost only 1.3 per cent of its value. No one wants to lose money at any time, but most people would have been quite happy to emerge from the past year with those results.

Model reflects market
I have updated the Model Portfolio to reflect the current market conditions. For now, I am maintaining a cautious stance until such time as we have some clear indications that the bear market has finally run its course.

Here is the updated mix:

Model Balanced Portfolio
Type of Security: Model
Canadian Money Market Funds 5.0 5.0
U.S. Money Market Funds 5.0 5.0
Canadian Bond Funds 20.0 20.0
U.S. or Foreign Bond Funds 20.0 20.0
Canadian Equity Funds (value) 12.5 15.0
Canadian Equity Funds (growth) 12.5 10.0
U.S. Equity Funds (value) 7.5 10.0
U.S. Equity Funds (growth) 7.5 5.0
International Equity Funds (value) 5.0 7.5
International Equity Funds (growth) 5.0 2.5
Totals: 100.0 100.0

Value orientation favoured
As you can see, I advise continuing to give priority to value-oriented equity funds over growth funds.

Growth will regain the ascendancy at some point, but for now value is king.

Remember, this is a balanced portfolio.  More conservative investors may wish to reduce the equity component to reduce risk exposure even further.