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| Adrian Mastracci, investment counsel at KCM Wealth Management, says “Design the appropriate investment game plan, then follow it. The investing experience will change.” |
For Immediate Release
Vancouver, BC (January 19, 2004): Designing the investment game plan requires much thought. Especially at this time of the year when registered accounts like the RRSP, RRIF and the lesser known DPSP, IPP and RCA take to the stage.
Adrian Mastracci, investment counsel at Vancouver's KCM Wealth Management, comments, “Investors spend too much time on selecting investments and too little time on establishing the investment policies and strategies. The ones the game plan will follow to reach the personal goals.”
“Few investors actually have a game plan,” adds Mastracci.
“Too often, this results in a collection of flavour of the day investments,” continues Mastracci, “Designing the appropriate game plan is vital, particularly the asset mix.”
“Registered accounts have become sizeable. For many investors, notably the self-employed, the RRSP is a replacement for a pension,” adds Mastracci, “Hence, special attention is warranted.”
“Managing the finances is truly a long journey,” observes Mastracci, “However, both men and women typically underestimate their nestegg requirements.”
Mastracci illustrates the implications of one planning example:
- A woman, age 50, wanting to retire at age 60 with an annual income of $60,000, in today's dollars, needs to accumulate a larger nestegg than a man of the same age.
- The man needs approximately $1,450,000 by age 60, whereas the woman needs over $150,000 more to provide the same income throughout her expected lifetime.
“Therefore, start with the question, What is important about the investment portfolio?,” says Mastracci.
“Many investors opt for preservation of capital, while some focus on portfolio growth,” points out Mastracci, “Others concentrate on the retirement income stream.”
“Make investment selection the last item on the list,” states Mastracci, “Ease up on speed. Park the funds for 2 or 3 months and formulate the appropriate investment policies for the situation.”
Mastracci highlights six key areas in designing the investment game plan:
1. Portfolio expectations
- Determine the desired retirement income goal in today's dollars. Then calculate the size of portfolio to reach and sustain the goal. This provides portfolio direction and purpose.
- Estimate the personal rate of return required to achieve the retirement nestegg target. Then treat the personal rate of return as the “minimum investment benchmark” for the game plan.
- Once the personal rate of return is identified, there is likely no need to incur any more investment risk than necessary. This is especially important to retired investors.
- Consider the RRSP/RRIF as part of the big picture, not in isolation.
2. Investor profile
- Determine which type of investor profile suits best. The most familiar ones are guaranteed, conservative, balanced, growth, aggressive and speculative.
- The majority of investors find a comfort level within 40% to 60% in equities and the remainder in fixed income instruments. A mix of assets for a balanced investor profile typically allocates 50% to stocks, 40% to bonds and 10% to cash instruments.
3. Asset mix
- Asset mix decisions have the greatest impact on portfolios than any other factor. Studies show that these decisions explain a substantial amount of variations in total portfolio returns.
- Portfolios ought to contain a variety of asset classes that don't all move in the same direction.
- Once asset allocation guidelines are determined, stay within the appropriate targets. Occasional rebalancing assists as markets drift.
- Rebalancing strategy sells overperforming assets and buys the underperformers. Another way to rebalance is to add new money into the portfolio (i.e. RRSP) or withdraw some (i.e. RRIF).
4. Diversification
- Diversification is associated with investment time horizons. Geographical diversification is also important, say into Canadian, US and global investment allocations.
- Asset mix decisions provide the biggest form of diversification. Allocation among asset classes such as stocks, bonds and cash.
- Limit single investments, say a stock, to a maximum of 4% to 5% of total portfolio value.
5. Risk matters
- Understanding the three major investment risks brings perspective to the plan. The ability to take risks, the willingness to take the risks and the need to take risks.
- The investment time horizon ought to be at least 5 years, preferably 7 to 10 years. If it is less, stocks may be too risky, notably during a volatile market.
- Assess the risks in each account. A capital loss incurred in the RRSP/RRIF becomes a real loss because there is no offset against capital gains.
- Consider whether the risk of stocks ought to be incurred outside registered plans. Perhaps, concentrate fixed income investments inside the RRSP/RRIF and equity investments outside.
- Be mindful of investment quality versus yield. Especially for investors nearing or in retirement. The reductions in yields in the past three years make it tempting to sacrifice quality.
6. Control the variables
- Pay attention to all the costs of buying, holding and selling the investments. Particularly the ones that do not send out invoices. The collection of MER and DSC costs can befuddle many investors.
- Understand the investments currently owned and those being contemplated.
- Part of the investing experience is about coming to grips with being wrong. What is most detrimental to portfolios is not incurring losses. Rather it’s keeping them far too long.
- Plan on some investment losses and skip the emotional attachments to investments. Know when to fold, take the medicine and sell the losers. No second guessing please.
- Minimize the taxable events. It keeps more capital invested.
- Performance has been over emphasized to exhaustion. A portfolio with emphasis on consistent returns serves better in the long run than one which emphasizes hot performance.
“It’s best to capture the appropriate policies and strategies in a written investment plan,” suggests Mastracci, “A blueprint for the financial house.”
“Asset mix is key to all portfolios,” concludes Mastracci.
“Design the appropriate investment game plan, then follow it,” summarizes Mastracci, “The investing experience will change.”
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