Q&A: Can’t sleep at night

Question: I read your book Sleep-Easy Investing,
unfortunately after having my portfolio invested in the market. A couple of
years ago my husband and I divorced and I received a $2.5 million payout on
the company we both owned. I went to a reputable bank broker and put 60% in
fixed-income and 40% in equities.

I also had an RRSP portfolio, all in equities, with another firm that my husband
and I had used. I felt I wanted to try something different. After about six
months, all the equity funds I was in were doing very poorly (mostly all global
funds) and I was losing approximately $50,000 so I decided to move my equity
portion to my old broker in August 2007. He proceeded to dispose of some of
the mutual funds and diversified me into a diversified stock portfolio. When
I started with this second broker I had approximately $1 million in equities
including my RRSP. Now, my portfolio is down to $800,000, approximately 20%
loss. I have lost faith in the market, and in my broker, and I do not sleep
at night.

I am an intelligent, mid-fifties accountant, however I have become obsessed
with the market and I don’t know if I have the strength to ride this out.
My first thought is to liquidate my portfolio, take the loss, and put it into
some safe fixed-income securities. From all my readings, this situation is going
to get much worse before it gets better. I am at loss as to what to do. Could
you please send me any recommendations? I realize this is a general question,
but basically do I hold and ride this storm, or do I cut my losses and liquidate
so I could sleep? — C.S.

Gordon Pape answers: Since you have read Sleep-Easy Investing,
you know that the basic premise of the book is that peace of mind takes priority
over a few extra points of return. Your question, however, suggests that you
have not committed yourself to adopting that kind of approach. You are torn
between the desire to unburden yourself of the financial pressure you are experiencing
and the understandable reluctance to lock in a significant loss. I am not a
psychologist, but it’s pretty clear you need to decide where you want to be
and act accordingly.

If you have a well-diversified portfolio, the conventional wisdom is to stay
with it and wait out the storm. Since you are only in your mid-fifties, there
is a lot of time to recover.

However, your mental health is important as well. If you are losing sleep
because of the state of the markets (and yes, more downside is possible), you
need to remedy that.

If I read your question correctly, most of your losses have occurred in the
RRSP, which is unfortunate because you won’t get any tax relief for that. Meantime,
it would seem that you have about $1.5 million worth of fixed-income assets
(60% of $2.5 million) in a non-registered account. This makes no sense from
a tax perspective.

The first thing I would suggest is to swap some stocks and equity funds in
the RRSP for an equivalent value of fixed-income securities outside the plan.
This will shelter your interest income (which is taxed at your marginal rate)
and will ensure that any future stock market declines can be claimed as capital
losses. Also, any dividends will be eligible for the tax credit.

You may then want to talk to your broker about moving some of the equity assets
into lower-risk securities that still offer some growth potential. For example,
we think REITs look attractive at current levels and we will be publishing an
in-depth review of the sector in the next issue of our Income Investor newsletter.

The bottom line is that only you can make the call as to whether to stay in
equities, reduce your exposure, or sell everything. And to do that, you need
to decide what type of investor you really are and hold to it.

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