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| Adrian Mastracci, president
of fee-only KCM Wealth Management, says "Selling
stocks and mutual funds to buy fixed income
investments is very popular now. However,
popularity is no assurance that it's the right
strategy." |
For Immediate Release
Vancouver, BC (October 11, 2002):
Bond investing is not well understood by many
investors. Actually, it's more misunderstood than
equities. Too often, knee jerk reactions later
turn into regrets. The "ditch and switch"
strategy could be the latest one.
Adrian Mastracci, president
& investment counsel at Vancouver’s
fee-only KCM Wealth Management
comments, “After watching stock markets
drops for nearly three years, many investors are
deciding that enough is enough. They throw in
the towel on the dreadful equities in favour of
switching to bonds and bond funds. After all,
several stock markets have dropped more than 20%
this year alone.”
“Perhaps, a case of poor timing. Perhaps,
they were swayed by the past performance of bonds,”
notes Mastracci, “Let it be said that chasing
past performance is an excellent strategy on how
to get burned.”
“So, the big question on the lips of many
investors is whether or not to ditch equities
and switch to fixed income investments”,
remarks Mastracci.
“Selling stocks and mutual funds to buy
fixed income investments is very popular now,”
says Mastracci, “However, popularity is
no assurance that it's the right strategy.”
“My premise is that if investors clear
their stocks and switch to bonds or bond funds,
they should do so only because it makes investment
sense and it's appropriate for them,” points
out Mastracci, “I'm an advocate of a fixed
income component in portfolios. However, it has
to make sense for every case.”
“If the predictions are correct, interest
rates could rise in the next year. Thus, bond
prices will decline,” explains Mastracci,
“This means that total returns for bonds
and bond funds for the next year could be lower
than those experienced in the past year. Total
return is defined as the cash yield plus any capital
gain or loss.”
“One of the biggest reasons why investors
experience poor results is that they have no game
plan in place,” indicates Mastracci, “It's
like building the house without the blueprint.
They will get a house, but not necessarily the
one they want.”
“Switching for the sake of switching is
not a strategy I subscribe to. Hasty and emotional
investing is a dangerous game,” describes
Mastracci, “Rather, investors should have
a game plan in place before any switching is contemplated.
One that contemplates things like the level of
risk, the investor profile, appropriate diversification
and a suitable asset mix of equities, bonds and
cash.”
“The individual portfolio selections ought
to reflect the game plan that suits the investor,”
suggests Mastracci, “The appropriate fixed
income component can then be filled from suitable
selections that may consist of bonds and/or bond
funds.”
“Investors should not sell the stock portfolio
just to buy bonds,” explains Mastracci,
“Perhaps, a valid reason to sell is that
the equity component is too high for comfort.
Perhaps, the game plan needs some polish.”
“A way to mitigate the problem of rising
interest rates is to maintain a ladder of bonds
not longer than 5 years,” concludes Mastracci,
“A portion of the bond portfolio could mature
every year for reinvestment at higher rates. A
staggered bond portfolio averages out interest
rate fluctuations.”
“Perhaps, the important question before
the "ditch and switch" strategy takes
affect is: Why do investors have what
they have? The answers I get to
this innocent question are absolutely astounding”,
summarizes Mastracci.
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