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| Adrian Mastracci, portfolio manager at KCM Wealth Management, says “The first consideration is what’s important to each investor. For example, is it growth or protection of capital?" |
Vancouver, BC (June 7, 2007): A third day of profit taking is a done deal. But it’s still not the real test for the bull markets.
Adrian Mastracci, portfolio manager at Vancouver based KCM Wealth Management, comments, “Those pesky markets have been shaken a little. They are still near the high watermark for the year. Yes, it is another good time to tweak the investment muddle.”
Nobody knows for sure whether the cheerful or gloomy scenario develops from here forward. It’s wise to be prepared for both outcomes. In particular, a down market can affect portfolios in significant ways.
The first consideration is what’s important to each investor. For example, is it growth or protection of capital? My recent newsletter indicated that capital protection was a top concern for all investors.
Today, many investors are carrying portfolios full of equities. Frequently sprinkled among a muddle of mutual funds. Especially, if there was no blueprint for buying them in the first place.
Market perspective
The markets have risen a long way since October 2002, the end of the last bear market. Investors are closing in on five years of upside results without a major correction, which I define as a 15% decline.
Savvy investors know that the good times don’t last forever. No doubt, markets can move higher from here and may well do so. But I'm not clever enough to accurately predict market direction.
Revisiting the investment mix makes sense now. It's prudent and sensible strategy for every investor to get the investment portfolio in shape. Preferably, selling into strength when prices are near the highs.
The bull market will be tested one day. Front-page financial headlines are starting to appear.
Raising flags
Here are some events that may raise a flag or two:
- Private equity pools are chasing all kinds of projects.
- Mergers and acquisitions are running at a high pace.
- US GDP declined to 0.6% in first quarter 2007, mixed signals for second quarter.
- US housing sector has cooled, bond rates are inching upward.
- US trade deficits remain high, US currency is weak, Canadian currency is strong.
- Debt burdens have risen, saving rates have fallen.
- China’s investors are turning to the stock market in record numbers.
- US job layoffs are making the scene again.
The biggest impact on portfolios is incurring a large loss. The question is how one would feel about a market decline. Say 10%, 20% or 30%. Especially when heading into, or during retirement.
What to do
The simple approach for many investors is to lighten up on some equities. Just a trim. Perhaps, pruning to a mix that resembles the investor's real profile.
Nobody has gone broke taking some profits. It's not a bad idea to sell at higher prices. Even if the investment continues to move up after the sale.
The key to this exercise is to revisit the personal investment profile, or to create one if it’s lacking. It’s also beneficial to revisit the total number of mutual funds owned.
This table provides an overview of equity targets for three of the most popular investment profiles:
| Investment Profile |
Equity Mix Targets |
| Income |
26% to 40% |
| Balanced |
41% to 55% |
| Growth |
56% to 70% |
Say an investor has 75% allocated to equities and the true profile is closer to 60%. Over time, the equity component would be trimmed. The proceeds then reinvested into fixed income.
Some investors add new money to the portfolio. They can keep the equities and allocate the fresh money to asset classes whose targets need to be increased. Such as bonds and cash instruments.
Don’t accept an investment mix that muddles along. Reshape it to match the personal profile. When the bull markets get really tested one day, it will not be a surprise. That’s a wise investment for all investors.
Your comments are welcome. I am available for a discussion.
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