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By Jonathan Chevreau,
National Post
The Wealthy Boomer Blog
Friday, November 03, 2006 |
Traumatic events like the Halloween Income Trust Massacre always furnish salutary lessons for investors, however painful they may seem in the short term.
Adrian Mastracci, portfolio manager at Vancouver’s ‘fee-only’ KCM Wealth Management, says, "There are ten lessons investors can draw from the income trust debacle."
From Bre-X to Enron to Nortel and the dot-com meltdown of 1999, you can always count on the market to provide fresh instructive material.
Yesterday, we passed along advisor Adrian Mastracci’s general guideline that income trusts should account for no more than 10 or 15% of a total portfolio.
Today, Mastracci emailed clients with a list of ten lessons they can draw from the debacle. I’ve taken the liberty of reposting them here:
1.) Something can always come out of the blue to spoil the investment party. Wise investors factor in such events into their investing strategy.
2.) Never make tax implications the driving force to buy any investment. The real test is whether the same holding would be purchased if the tax provisions were stripped away.
3.) Going overboard on any hot bandwagon is a recipe fraught with financial dangers. Particularly for someone in the midst of retirement who relies on a regular income stream.
4.) It's difficult not to like high yields. One just has to factor in the corresponding risks. Income trusts are still equities with high yields.
5.) Concentrating the portfolio holdings in a few selections is a dangerous strategy.
6.) When a trust pay out most or all of its earnings, it leaves less room for reinvestment into growing its business.
7.) It makes sense for every investor to stick to a personal asset mix. One that is comfortable and designed the specific situation.
8.) Trusts are also part of the TSX Composite index. Anyone who buys the index makes an investment in income trusts.
9.) It’s smart thinking for investors to expect that a few holdings in any sector will become lousy investments. Yes, factor that event into the investment decision.
10.) Income trusts is one area where diversification can truly save the day. Diversification is the best medicine to achieving some preservation of capital.
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