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By Ray Turchansky
Edmonton Journal
Wednesday, July 19, 2006
It may be time to lower your portfolio’s equity return, expert says.
Vancouver-based financial adviser Adrian Mastracci of KCM Wealth Management Inc. feels it’s time for a segment of investors to turn defensive, at least temporarily.
Adrian Mastracci, investment counsel at Vancouver’s ‘fee-only’ KCM Wealth Management, says, “If you need the capital preservation, you don’t want to be in a situation where you’re looking at dropping prices.”
Many analysts feel stock markets will gyrate substantially but windup flat overall until the November congressional elections, then resume an upward climb. Others think we have one last leg of a bull market ahead of us, then the big plunge will come. Still others feel a bear market has already started.
“I think we’re going into a case where the U.S. job creation has not been stellar, retail sales are softening, the two-year and 30-year rates for bonds are the same, that’s insane—that tells me we’re getting into a bit of a slowdown,” said Mastracci.
“If you get a slowdown in the States, which translates into a global slowdown, everybody’s going to be affected somewhat. If you need the capital preservation, you don’t want to be in a situation where you’re looking at dropping prices.”
He feels that people who are looking at retirement within a few years or who are already retired should pull back their equity holdings and concentrate on preserving their capital, at least until the volatility disappears from the markets, when normal investing can be resumed.
Mastracci sees many people with retirement on the horizon still holding 70, 80 or even 90 per cent of their portfolios in stocks and mutual funds and income trusts. He said those people should convert 30 percent or so of their equities into fixed-income products for at least a year, and earn 4.5 percent or so on them just to avoid taking a major hit to their portfolios at a crucial time. He suggests people holding 50 per cent in equities cut back to 30 per cent, and those holding 30 percent reduce to 20.
But first, there are some considerations to be made. Try to avoid switching out of mutual funds with deferred sales charges on them. And be aware of having to pay capital gains tax on profits you make in non-registered accounts.
“If l have a choice, I start with the RRSP or RRIF, where you’re not going to get into the tax ramifications, unless you’re taking the money out. Then move to the personal and corporate accounts—in those you’ve got the capital gains to look at. Never be afraid to take a little gain off the table, never let tax drive your decision. Just about every portfolio I see has a dog in it, and l say, ‘Let’s sell the dog first and apply it to the good stuff that you’re going to switch from equity to fixed income.”’
Once you’ve decided what you’re going to switch out of, the question is what fixed income to convert to.
Mastracci suggests treasury bills, strip bonds from the Government of Canada and provinces of Ontario and British Columbia, Banker’s Acceptance (corporate bonds guaranteed by a bank), and bank bonds themselves. The Money Reporter newsletter suggests other corporate bonds such as Bell Canada, BCE inc., TransCanada, Thomson Corp., Canadian Tire Corporation, Hydro One and Loblaw Cos. Ltd.
Another investment, although somewhat more risky is dividend-paying securities, which traditionally don’t tumble as much as others when markets fall. The next decision is how long to pull in your horns.
“I would be defensive for a year to a year-and-a-half. I would start now when the markets are still, relatively high, doing the massaging and changing.”
The tradeoff for having a stabilized portfolio is that you could miss out on a run-up in the markets if a downturn doesn’t occur.
“It may never happen,” said Mastracci. “You may have to go back in and buy it even at a higher price, but at least you’ve got 4.5 per cent.
“Let’s never forget that incurring large losses is a big impediment to portfolio growth. Hence, a temporary tradeoff to earning a fixed-income return is quite acceptable for many who are not comfortable with the risks.”
Just scrutinizing your portfolio is value in itself.
“At least you’ve looked at it and thought about it.”
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