By Jonathan Chevreau
National Post
FP Investing
Tuesday, August 27, 2002

Be an RRSP bear and a non-registered bull. Such counsel may sound like it betrays an advanced case of investment schizophrenia, but it's the conclusion I've belatedly come to after watching the market confusion of the past year.

It's apparent that pundits and investment advisors are almost as confused about the market as the ordinary investors they're supposed to lead. An earlier column on the "Who Knows? 50/50 approach" to tax-effective asset allocation noted that bulls and bears are so far apart in their prognostications on the future of the stock market that the average investor can be forgiven for concluding in despair "who knows?"

For middle-aged balanced investors, the column therefore suggested splitting portfolios 50% equities and 50% bonds. Furthermore, it suggested tax considerations rule by putting nothing but fixed-income, interest-earning investments (cash, bonds, GIC’s) into registered portfolios and only stocks or equity funds in non-registered portfolios.

That way, interest is sheltered from punitive taxation, while less-harshly-taxed capital gains and dividends are held in non-registered portfolios. It also argued that RRSP contribution room in Canada is so limited -- about half the equivalent in the United States or Britain -- that it is too precious to waste on the possibility of losing stock or equity fund plays.

The approach seems to make sense to some financial advisors who emailed me their reaction.

"Your sawing through the middle is probably one of the better answers," says Hans Merkelbach, who comes down on the bear side himself.

"It seems the message is getting more confused all the time. Different opinions: some from excellent analysts, some from the shills."

Adrian Mastracci, a fee-only advisor at KCM Wealth Management in Vancouver, is more bullish on equities, but realistic.

Mr. Mastracci says he has both bears and bulls among his clients, whose attitude toward the stock market depends on specific personal conditions, such as whether they are still accumulating their nest eggs, or have begun to enjoy the fruits of retirement.

"It's not unusual to design a strategy for one that is vastly different from the other. Some can stand the risk of betting on equities, while others have a greater comfort in the fixed income composition," Mastracci says.

Whichever camp they're in, investors need to stop reacting to every daily market sneeze, whether bullish or bearish. Investors need to avoid making hasty emotional decisions and concentrate on factors they can control, such as level of risk, asset mix and allocations, Mastracci says.

"If stocks have that risky feeling, prune them gradually. If stocks have the bargain bin feeling, buy them gradually."

In a Web discussion of the "Who knows?" approach, Saskatoon-based retired investor Keith Betty -- who posts as Shakespeare -- said the 50/50 approach is fine "from a safety point of view" but brings out a psychological problem: not taking profits in the non-registered account because of the tax hit.

Indeed, this classic investment mistake of letting the taxation tail wave the investment dog is why some chastened Canadian investors rode Nortel Networks all the way from $124.50 to its current price of about a hundredth of that. They may have had the consolation of taking the tax man down with them, but both sides would have been better off taking profits while they were there to be had.

But it's one thing for an overvalued tech stock to plunge so precipitously. It's quite another to forecast that such a venerable stock index as the Dow Jones industrial average could fall below 1,000, as does author Robert Prechter Jr.

As some readers pointed out, if such an unbelievable event did occur, we'd have a lot more to worry about than what remains of our stock portfolios. Defending hearth and home from hungry marauders would be one of our new higher priorities.

Even so, Merkelbach insists Prechter's work is "of the highest quality." He says the 1990s bull market is over, "although the majority of investors can't believe it. Ever talked to an alcoholic about giving up the booze?" The bulls bad-mouthing Prechter are themselves in denial, Merkelbach says.

Canadian bulls and bears are also taking each other on in the press. On his daily radio commentary, Garth Turner -- a former minister of national revenue, now a prominent businessman -- attacked financial advisor Stephen Gadsden's call for a looming depression, comparing him with such failed Cassandras as Ravi Batra (author of The Great Depression of 1990.)

Gadsden shot back in The FundLetter with an analysis of how leveraged investors would have fared if they'd followed Turner's 1997 book, The Strategy, which advocated tapping home equity to buy stocks.

Merkelbach says Gadsden may be close to the truth "though I believe the expectant inflation forces are already at work." Trends in the commodities index are signalling inflation, he says, so Prechter's call for deflationary depression may be off base. "Do you really think Greenspan and the other central bankers are going to let the global economy slip into a deflationary depression? The printing presses will be rolling overtime."

All of which is more grist for the "Who knows?" mill. Bull, bear, inflation, deflation. Spare yourself the analysis paralysis and become an RRSP bear and non-registered bull.

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.