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By Fiona Anderson
Vancouver Sun
“Business BC” Section
with files from David Berman, Financial Post
Wednesday, January 04, 2006
The TSX composite index reached a high on Tuesday, up 22 per cent from a year earlier, but analysts are sounding a note of caution amid the market euphoria.
Adrian Mastracci, investment counsel at Vancouver’s ‘fee-only’ KCM Wealth Management, says, "The best portfolio is a balanced one that protects against devastating losses, rather than aiming for unrealistic returns.”
"A lot of people go chase those wonderful red-hot sectors," said Adrian Mastracci, investment counsel with KCM Wealth Management. "Well, every sector that goes hot, goes cold . . . [and] it's hard to tell when to turn."
The best portfolio is a balanced one that protects against devastating losses, rather than aiming for unrealistic returns, Mastracci said. Last year that type of portfolio would have yielded returns of between seven and 10 per cent, with some assets invested in Canadian equities on the TSX and others in stocks from other exchanges, that didn't fare as well, or in other securities, such as bonds.
Of course, hot stock markets are nothing new. In September 2000, when the TSX composite index reached its previous record, the tech bubble was just bursting and Nortel Networks Corp. was trading at $122.
At the time many people were over-weighted in technology, said John Caspar, vice-president and investment adviser. But those with a balanced portfolio should have done fine.
At the time technology stocks made up about 35 per cent of the TSX. Now energy makes up a large percentage, Caspar said, and investors have to protect against over-exposure.
"If you are just looking at the benchmark, and the benchmark is no longer really a sane representation of good sector risk management, that certainly can become an issue," he said.
Caspar agrees that avoiding loss is the best wealth management strategy because it is difficult to recover.
"So in the investment game being a tortoise often makes more sense than being a hare."
Caspar does not expect the market bubble to burst as it did in 2000, however it is impossible to know what speculators will do he said. And it was the speculators and inexperienced investors that were left holding the losses when the tech bubble burst, he said.
"It's difficult for many people to resist when your neighbours are jumping up and down and yelling about how rich they are getting and how smart they are," he said.
Caspar warns that past performance is no predictor of the future.
He expects that the TSX's performance in 2006 will be less glamourous than 2005, with single-digit returns. But other analysts are more pessimistic and that may be the key difference that prevents a repeat of the tech crash in 2000.
In 2000, many investing professionals believed the spectacular stock market gains were just the beginning of good times for equities in general, and tech stocks such as Nortel in particular.
Now, strategists interviewed by the Financial Post are predicting an average return of just two per cent for the index in 2006, which is far below the double-digit gains posted during each of the past three years.
If these lacklustre forecasts are right, the benchmark index may have hit a new peak, but it may also turn in its worst performance since 2002.
Kate Warne, Canadian market strategist, said that the benchmark index is no longer sufficiently diversified for most investors because it is concentrated in just a few sectors.
Financial stocks represent more than 30 per cent of the index, making investors exposed to a possible correction in bank stocks. And energy stocks represent more than 27 per cent of the index, making investors overly reliant upon high oil and gas prices.
"One of the things that Canadians should be doing right now is invest outside of Canada," Warne said.
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