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Adrian Mastracci, investment counsel at KCM Wealth Management, says "Some investors, however, have accumulated nesteggs where it may be prudent to ease up on the equity investments they hold. Perish the thought; sell a few of them." |
For Immediate Release
Vancouver, BC (March 11, 2004): Stock markets have sure risen a long way since their bottoms.
Adrian Mastracci, investment counsel at Vancouver’s “fee-only” KCM Wealth Management comments, “First off, a happy birthday wish to the return of the bull market. Only a year ago, investors were still agonizing as to how resilient the bear market was. Now, it’s not even a faint memory. All but forgotten; everyone’s happy at long last. For now.”
“Some investors, however, have accumulated nesteggs where it may be prudent to ease up on the equity investments they hold. Perish the thought; sell a few of them,” muses Mastracci, “Who said that no advisor suggests something be sold!”
“Nonetheless, I can already hear the thunder and lightning unleashing the fierce storm of the year,” adds Mastracci, “And it feels like it’s heading in my direction.”
“The big question is why would anyone, in their right mind, sell equities after having held them through the agony of the bear market only recently departed,” notes Mastracci, “Furthermore, many equities have rallied very nicely from their lows.”
“While selling does sound like unparalleled and drastic action,” says Mastracci, “Some investors may find good reasons to take this unusual plunge. Perhaps, even improve their situation.”
“Let's face it, some nesteggs of today hold close to 100% invested in a variety of equities. Judging from portfolios I’ve seen, that level is too high for most of those people,” observes Mastracci.
“The continuing dilemma is that these investors are not at ease with such high concentrations of equity investments,” remarks Mastracci, “They require an investor profile in the aggressive to very aggressive ballpark. Clearly, a profile that most investors would not be happy with.”
“Similar arguments can be made for investors who dumped the dreadful equities during the bear market in favour of fixed income,” explains Mastracci, “You know, the safe haven stuff.”
“This practice was a bandwagon of the day,” recounts Mastracci, “However, these investors likely don’t have the investor profile to sustain the risks of today’s fixed income portfolio either.”
“So, what actions can investors contemplate now?” says Mastracci.
Let’s turn to some concepts worth noting:
- Decisions about which asset classes to own have the biggest impact on investment portfolios. Yes, the biggest. Studies have demonstrated some interesting conclusions.
- First, the mix of stocks, bonds and cash, explains on average 94% of the contribution to total returns. Next, stock selections explain on average 4% of the contribution to total returns. Finally, timing the markets explains on average 2% of the contribution to total returns.
- Clearly, this tells me that the high percentage bet is on asset mix. That’s the one I concentrate on for my client portfolios.
- Other influences, such as timing the entry into the markets and exits out of the markets, are very low percentage bets. A mug’s game not worth considering.
- In my experience, the majority of investors can relate with a 40% to 60% allocation to equities, say in stocks and mutual funds. The rest in fixed income, such as bonds and cash instruments.
- The stock market rise may be an opportunity for some to ease up on equities, as the needs dictate. After all, we’ve had practically a non-stop bull market since March 2003.
- Now is an appropriate time to do two things. Particularly, if the portfolio holds close to 100% in either equities or fixed income.
- First, figure out or revisit what your suitable asset mix ought to be. Second, take the necessary steps to rebalance the portfolio components to agree with your chosen mix.
“I continue to focus on the portfolio asset mix that fits the investor profile,” states Mastracci, “It's the one that brings home the bacon and lets you sleep well.”
“Make asset mix your friend and ally. Adopt a mix that best suits your investor profile,” suggests Mastracci, “For example, a balanced profile may allocate 50% to equities and 50% to fixed income.
“Understanding your asset mix policies improves your investment success,” points out Mastracci, “Another benefit of investing within your appropriate asset mix is reduced investment risks.”
“Take action based on your need. If you are comfortable with your present asset mix, there may not be any reason to make changes,” summarizes Mastracci, “At the very least, review the mix and confirm that the path you’re on still makes sense in view of your goals.”
Mastracci concludes, “Investing is always about what’s appropriate for you.”
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