“Living at risk is jumping off the cliff and building your wings on the way down.”

— Ray Bradbury, American fiction writer (1920–)

Adrian Mastracci, portfolio manager at KCM Wealth Management, says “Today is a difficult environment in which to make money."

Vancouver, BC (November 19, 2007): Do investors know what their portfolios are really up to these days? Could portions be dabbling in the risky bin?

Adrian Mastracci, portfolio manager at Vancouver based KCM Wealth Management comments, “Judging by some recent portfolios I’ve reviewed, Mr. Bradbury has a valid point. Many portfolios could well be risking the investors’ money and goals. Possibly, without their knowledge.”

My premise

This brings me to my premise. Now is a good time to reflect on the appropriateness of the investment roads being taken. Right in the middle of lingering market turmoil. When “debt crisis”, “rough patch”, “wall of worry”, “sub-prime mess” and “housing slump” phrases are staples in daily headlines.

Today is a difficult environment in which to make money. Some days it seems that there is no safe harbour to be found. Plenty of jitters everywhere. The prospects of $400 billion in estimated losses for US mortgage lenders make for some icy moments. Worse, nobody knows the size of the real number.

Markets don’t deal well with uncertainty. Neither do investors. Changes to portfolio compositions are infrequent. A popular approach is riding bear markets down, then hitching up to the bull.

Some new investments are purchased every so often. Added to existing collections. The result is a muddle of 15 to 25 mutual funds. Sometimes more. Many funds don’t always fit well together. They have duplication of securities. Other issues of tax friendliness, fees and currency risks also surface.

Sadly, periodic reviews of the selected investments are not the norm. That can spell danger for some portfolios. One hidden hazard is not being aware of what’s going on inside the portfolio. Notably, for investors who don’t know their investment profiles.

My questions

Portfolios can be analyzed in many ways. Plenty of questions to contemplate. I’ve whittled the process down to a short list to get started. The rest of the exercise can continue once these are dealt with.

Every investor ought to ask these three probing questions:

1. Why do I own the investments that I own?
2. Am I comfortable with the present mix of investments?
3. Would I buy the same investments today?

The questions are simple, but inquisitive. The answers are powerful and revealing. Investors may not have contemplated all the implications, so candidness is a must.

Issues like these are particularly troublesome for many investors. Often, they don’t know the answers. The questions get back to the heart of what is important to investors about financial security.

If the replies provide reassurance, there is probably little or no reason to fix something that’s not broken. However, changes may be of interest to investors who express doubts or concerns. Seeking a portfolio review may be a valuable exercise. Perhaps, a total portfolio redesign.

My guidance

Let’s turn to pension plans for some simple guidance. They focus on investment policies and strategies before investment selections. They are not shy about asking probing questions. They have been following this approach for decades.

I summarize some tactics for consideration:

1. Pension plan managers are skilled at long-term thinking. They understand that short-term moves are a normal part of the long investment journey. Often lasting 30 to 50 years. Investors too can reap benefits from this approach.
2. Pension plans routinely review their asset mix policies. Investors can also examine the suitability of the mix on a regular basis. Combinations like equities, bonds, cash and real estate have the biggest impact on portfolio returns
3. Pension plans rebalance their asset mix periodically. In the quest to seek and maintain the cashflows that satisfy the long-term pension benefits. Likewise, investors can adopt similar strategies to tweak their portfolio goals.
4. Pension plans resist temptations to incur unwanted risks. If a touch of aggressive investing is fitting, limits are placed on such investments. Say by allocating not more than 5% to 20% of total portfolio value
5. Pension plans implement time-tested practices. Adopt their planning ways. Ensure that no one investment tips the ship or creates lasting portfolio damage. The employer stock can be problematic at times. Think of the portfolio as a core of the personal pension plan.

Well-informed investors focus on strategies. The three probing questions are a great start. The answers pave the way to better, more informed decisions.

Invest like a pension plan. A straightforward approach. One that keeps the portfolio from risking the investors’ money.

I welcome questions, comments and opinions.

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.