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| Adrian Mastracci, president
of KCM Wealth Management, says "Make
security selection the last item on your list.
Park your RRSP funds in a short term instrument
and formulate the diversified strategy appropriate
for your situation." |
For Immediate Release
Vancouver, BC (January 17,
2003): Achieving diversification within
your registered accounts takes many forms and
some thought. This applies to all registered plans,
such as the RRSP, RRIF and the lesser known DPSP
and RCA.
Adrian Mastracci, investment
counsel & president of Vancouver's “fee-only”
KCM Wealth Management,
comments, “RRSP diversification offers you
long-term portfolio protection in the markets,
especially during bear markets. Designing prudent
diversification strategy for registered plans
assists in attaining those personal goals sooner.”
“Investing is about setting a course to
achieve a specific return to meet unique long-term
goals,” notes Mastracci, “Goals that
can be different for each investor.”
“Managing a diversified RRSP is truly a
marathon,” mentions Mastracci, “Especially
as the RRSP/RRIF combination spans the investor’s
lifetime. Perhaps, also a spouse’s lifetime.”
“First, ask the question, What is important
about the RRSP to you?” says Mastracci,
“Many say it is the preservation of the
nest egg, some emphasize growth of the portfolio,
while others say it is the income stream for a
comfortable retirement.”
“Make security selection the last item
on your list,” explains Mastracci, “Park
your RRSP funds in a short term instrument and
formulate the diversified strategy appropriate
for your situation.”
Mastracci outlines some ingredients to design
RRSP diversification strategy:
- Determine which type of investment personality
suits you: conservative, income, balanced, growth,
aggressive or speculative.
- Relate the amount of prudent diversification
to your investment time horizon.
- Asset allocation decisions provide you with
the biggest form of diversification. That is,
your allocation among classes of assets such
as cash, bonds and equities. Along with a mix
within these categories of say large companies
versus small companies, value versus growth.
- Your asset allocation is dependent on factors
such as the number of years until your planned
retirement, your appetite for risk and your
age. Studies have shown that asset allocation
decisions explain, on average, 94% of the contribution
to total return.
- Once you have determined your asset allocation,
it’s important to stay within your appropriate
targets. As markets drift, you may rebalance
once or twice a year, but don’t get carried
away with this practice.
- Periodic rebalancing strategies sell some
existing overperforming assets and buy others
who have underperformed. Another way to rebalance
is to inject new money into the portfolio.
- Portfolios ought to contain a variety of
asset classes that don't all move in the same
direction.
- A ladder of interest rate maturities has
long been recognized as an effective way of
protecting against the ravages of falling interest
rates.
- As an illustration, a five-year ladder would
have one fifth of the income portfolio value
maturing every year. This strategy likely avoids
all maturities occurring during low interest
rate periods.
- Keep every single investment vehicle, such
as a stock, to a maximum of 4% to 5% of portfolio
value.
- Make sure that your investment time horizon
is at least 5 years, preferably 7 to 10 years.
If it's less, equities may be too risky for
your situation, especially during a bear market.
- Consider whether the risk of equities in
your portfolio ought to be incurred outside
the RRSP portfolio. If it's appropriate in your
situation, you may choose to concentrate the
income investments in the RRSP and the equity
investments outside the RRSP.
- Be careful of the level of risk that you
take inside an RRSP. A capital loss incurred
in an RRSP becomes a real loss because there
is no offset against any capital gain.
- Be cognizant of the issue of quality of the
investment versus its yield. Especially for
those at or nearing retirement. The reductions
in income investment yields in the past two
years makes it tempting to seek higher yields
at the expense of quality.
- Another form of diversification is whether
you adopt a passive or active investment strategy.
This question does not have to produce an either/or
answer. Rather, it may make sense to pursue
a combination of the two strategies as appropriate.
Say a core of one and a sprinkling of the other.
- Making diversified portfolio selections is
not about always being right. Part of investing
is about coming to grips with the prospects
of being wrong. What is most detrimental to
portfolios is not incurring losses. Rather it’s
keeping them far too long.
- Plan on some of your investments to result
in losses, even if you’re well diversified.
Moreover, don't get married to your investments.
If your strategy is not working, know when to
fold, take the medicine and sell the losers.
- Performance has been over emphasized to the
point of exhaustion. A portfolio with emphasis
on consistent returns will serve you better
in the long-term than one which emphasizes hot
performance. Even at the same level of diversification.
“If you’re not comfortable with the
diversification of your RRSP, portfolio seek professional
counsel for other opinions,” indicates Mastracci,
“Your retirement nest egg depends on it.”
“Diversification is a key element of RRSP
portfolios,” concludes Mastracci, “Pay
special attention to your asset allocation decisions
and you stand a higher chance of attaining your
personal goals.”
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