By
Steve Maich
National Post
State of the Markets
Quarterly Report
February 16, 2001
Everybody likes to control their own destiny, but when building
a good investment portfolio a little bit of knowledge can be a dangerous
thing.
It's been said a thousand times that the only two motivations that
drive the capital markets are greed and fear. In the late 1990s,
as stocks burned a path for the stratosphere, we felt the powerful
grip of greed. In our State of the Markets poll, Canadians said
greed was an even bigger factor in the market meltdown than the
technology boom.
Now, we're all getting used to the F-word. When the next bull market
takes hold, money managers will tell you to remember the seven deadly
sins of portfolio building.
Deadly Sin No. 1 - Not matching asset classes to your risk
tolerance and age.
Most money managers say a well-balanced portfolio holds 65% stocks,
25% bonds and 10% cash. The closer you are to retirement, the more
bonds and cash you should hold. If you're younger than 45 and investing
for the long term, money managers will tell you to buy more stocks.
When the bull market was raging, many investors bought stocks exclusively.
But with the TSE 300 down 40% during the past 18 months, a 7% to
10% return in bonds has been looking pretty good.
Deadly Sin No. 2 - Too few securities/not enough diversification.
If you have a self-directed RSP, there's a good chance you hold
too few securities. A good way to solve this problem is by buying
balanced mutual funds with part of your portfolio, or buying exchange
traded funds based on a particular index like the TSE 300 or S&P
500.
Your workplace may offer company stock at a discount, which is
often a lucrative way to save. But don't let one stock dominate
your retirement fund.
Adrian Mastracci, president of
KCM Wealth Management says, “What is most detrimental to portfolios
is not incurring losses, it’s keeping them far too long.”
Deadly Sin No. 3 - Narrow nationalism.
Canadian RRSP rules limit the amount of foreign content in your
retirement savings to 30%, and most money managers will tell you
to maximize it. Buying securities outside Canada gives you a chance
to cash in on growth opportunities in other parts of the world.
Spread your foreign content beyond the United States. Huge growth
opportunities exist in developing markets, but don't put all your
eggs in one nation's basket.
Deadly Sin No. 4 - Chasing last year's fad investment.
This is a mistake that Adrian Mastracci, president of Vancouver-based
KCM Wealth Management, has seen too often.
"Investors are preoccupied with accumulating a collection
of yesterday's winners," he said.
History shows that consecutive bull markets have never been led
by the same sector. That means the chances of technology repeating
as market champion are slim at best. Always look forward and try
to judge what's in a position to lead the next rally.
Deadly Sin No. 5 - Letting emotion rule your portfolio.
We live in an age of 24-hour stock TV, and more mainstream business
coverage than ever before.
Be well-informed but don't react to each twitch of the economy
and every spike in a stock's price.
Deadly Sin No. 6 - Failing to set exit points.
Everybody buys stocks expecting them to rise, and nobody likes
to admit defeat by selling at a loss. But when the market turns
against your favourite stock, don't go down with the ship. Head
for the lifeboats.
"What is most detrimental to portfolios is not incurring losses,
it's keeping them far too long," Mr. Mastracci said. "Every
loss starts out as a small loss."
Pick a price at which you will sell a stock. And stick to your
plan.
Deadly Sin No. 7 - Ignoring alternative asset classes like REITs,
income trusts and gold.
Income trusts invest in a wide range of dividend-paying securities
and provide a predictable rate of return, while Real Estate Investment
Trusts provide a high-yield way to play the property market. And
many money managers believe a small holding of gold -- 2% to 5%
of your savings -- helps protect against a total economic meltdown,
which would spark a surge in the price of the metal.
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