By Malcolm Morrison
Canadian Press
Friday, June 23, 2006

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There have been trying times lately for investors and their digestive systems. The Toronto stock market staged a correction as a lengthy unbroken string of advances on the backs of commodity stocks started to flame out in May.

Adrian Mastracci, investment counsel at Vancouver’s ‘fee-only’ KCM Wealth Management, says, “For the person who is risk averse, and can't stand the ups and downs, that person really shouldn't be in too much of an equity side.”

By late June, the Toronto market's main index was down 12 per cent from its peak April 19.

The temptation is to flee the market and head for the hills during times like these but analysts say that could be a big mistake.

"It's a good time to take a good, hard look at asset allocation," said Patricia Lovett-Reid, vice president TD Waterhouse.

"And buy into some of these good quality equities that they tend to hold for the long term. And I'm talking blue chip, dividend-paying, real earning companies that have been taken down with the tide."

Asset allocation is an extremely important exercise. It spreads out risk by spreading your money out between bonds, stocks and cash.

And it can become unbalanced during strong periods in the stock markets when investors find themselves putting too much money in one area.

Likewise, these same people can be found upping their fixed income component to an unhealthy degree at a time when equities are slipping.

"For the average investor out there, with a reasonable time horizon, a conservatively balanced portfolio will be 50-50 [stocks versus fixed income/cash]," said Reid.

"And it does make sense even when the markets are on a tear."

However, portfolio makeup is a very personal decision based on risk -- and the recent shakeup may convince some investors that the stock market is not where they want to be -- period.

"For the person who is risk averse, and can't stand the ups and downs, that person really shouldn't be in too much of an equity side," said Adrian Mastracci at KCM Wealth Management in Vancouver.

"Maybe at best, be in something with a dividend attached to it. They're going to fluctuate but they're not going to be falling out of bed."

But while you're sleeping better, you will have a tough time making big gains with too much fixed income.

"You will have to take on some corporate risk," said Mastracci.

"Maybe you can have a diversified portfolio, some shorter-term stuff, maybe some Canada, some provincials, some corporate, where the average might be 4.5 per cent let's say, that's probably reasonable, realistic."

Analysts also point out that the Toronto market is down about 12 per cent from its peak in April -- which is fairly shallow as far as corrections go. But necessary since commodities and resource stocks had run up far too much too fast.

"Historically, we get a 10 to 15 per cent correction every four or five years and the odd five per cent correction in between," said financial planner Richard Yasinskin of Financially Sound in Stittsville, Ont.

"So I think we need to go to 15 per cent and then take a look. I'm saying we haven't had a 15 per cent correction since the market dropped, since the tech wreck in 2003. We could easily see a 15 per cent correction from peak to trough."

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.