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By Jonathan Chevreau
National Post
FP Investing
Friday July 26, 2002
A well diversified portfolio allocates 50% to stocks.
Not all Baby Boomers are bailing out of stocks, financial planners
and retired Boomers say.
Responding to yesterday's column outlining James Cramer's controversial
"Boomers are bailing" thesis, Vancouver-based advisor
Adrian Mastracci of KCM Wealth Management
said, "Thankfully, my calls from Boomers are completely different."
Mastracci says clients are not bailing out of equities and swimming
to the lifeboats. "They all have part of their portfolio allocated
to fixed-income securities. This makes a substantial difference."
Where Cramer is closer to target is a particular type of investor
who overdosed at the top of the bubble on fashionable tech stocks,
who are now looking for advisors to straighten out what's left of
their battered portfolios.
He's hearing from potential clients who had "virtually everything
in stocks. The past five new clients had 85%, 90%, 95%, 95% and
100% in equities," Mastracci says, "Obviously, they had
not heard of asset allocation and investor profiles until I pointed
it out."
It's hard to believe that in this age of 24/7 media and Internet
coverage of investing that 50-year old investors haven't absorbed
the lesson of asset allocation.
Adrian Mastracci, president of
KCM Wealth Management, says “Clients are not bailing out of
equities and swimming to the lifeboats. They all have part of their
portfolio allocated
to fixed-income securities.”
But I'm not that surprised. The past year I've heard from many
retirees whose advisors -- whether out of ignorance or malice --
had elderly clients still 100% in equities.
High equity content is "probably the biggest difficulty with
Boomer portfolios," Mastracci says, "often coupled with
an investor profile that has no resemblance to the actual allocations."
Asset allocation is not the same thing as diversification. A portfolio
of a dozen equity mutual funds representing stocks from around the
world, in all the economic sectors and representing companies of
all sizes, is still not diversified enough -- because it's not asset
allocation.
Such portfolios consist of only one asset class: stocks, also known
as equities. There are at least two other core asset classes: bonds
and cash, plus several optional asset classes: precious metals/gold,
commodities/managed futures, real estate and short-selling hedge
funds, to name a few.
Since Baby Boomers are roughly half a century old, their core asset
allocation should be almost evenly divided between stocks and cash/bonds.
Every case is different and professional advisors can suggest the
exact appropriate mix.
Despite three years of sagging stock markets, diversified low-cost
portfolios have held up amazingly well, says the Web site www.bylo.org.
Using this newspaper's FPX indexes as a benchmark, from inception
in April 1996, the Balanced (50%/50%) portfolio returned 7.2%, Income
(70%/30%) portfolio 7.7% and Growth (30%/70%) portfolio 6.6%. Any
of these returns are very different from the devastating losses
some investors have suffered.
Asset allocation was the key to the Rip Van Winkle portfolio I've
described in columns aimed at younger investors with modest RRSPs.
A simple balanced fund -- preferably a low-cost one like Trimark
Income Growth -- provides instant asset allocation.
As portfolios grow, tax considerations bring complications. But
after a decade at this job, I've come to the following simple approach
which may help free you from worrying about markets every day.
If you're in the 50-50 camp (near age 50, with a risk profile of
50% stocks and 50% bonds), forget about stocks and pack your RRSP
entirely in a ladder of strip bonds and real-return bonds, or a
high-income bond fund. Such investments are too highly taxed outside
RRSPs.
By now, Canadian Boomers should also have started to build a non-registered
or "taxable" investment portfolio. If this is roughly
the size of your RRSP, it can be packed with quality dividend-paying
stocks and equity funds.
Again, taxes are a major consideration: Canadian dividends receive
favourable tax treatment, and capital gains and losses are better
handled in non-registered vehicles.
I'd go so far as to suggest this: the core of a non-registered
portfolio need be no more complicated than being half the Barclays
i60 exchange-traded fund (passively managed Canadian stocks, MER
0.17%), and half a reasonable priced active global equity fund like
Trimark Fund (MER 1.62%).
If Boomers are bailing, it's because they now realize their registered
plans are too heavy in stocks.
For many, their non-registered portfolios are smaller than their
RRSPs, which means the bear market is an opportunity to gradually
build up a quality non-registered portfolio.
I also heard from Boomers who still believe in stocks. Norm Rothery,
publisher of Toronto-based The Rothery Report quips that he hopes
Boomers will flee the markets more quickly. "I hope to spend
another 50 years or so on this rock and I'd like to see low low
prices."
Keith Betty of Lethbridge retired in 1998 at the age of 50 and
continues to advocate a mix of bonds, quality dividend-paying stocks
and REITs (real estate investment trusts.) His portfolio is up 30%
since retiring.
Since world markets tend to move down in tandem, investors must
include non-equity assets in their portfolio, he says. However,
"this isn't the time to exit equities altogether. Buy well-managed
companies, with real earnings and real dividends, that have been
beaten up."
Selling all your equities now would be "utterly wrong,"
Betty says, "Just the opposite: I have sold bonds in the last
few weeks to increase my equity holdings."
Betty cleaves to the 3Ds of discipline, diversification and dividends.
His ideas can be found on the Web at "Shakespeare's investment
primer" at www.telusplanet.net/public/kbetty/retireinvest.shtml.
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