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By Paul Delean
The Montreal Gazette
Monday, November 27, 2006
It's human nature to want to get the best possible price for something.
Adrian Mastracci, fee-only portfolio manager at KCM Wealth Management in Vancouver, says, "Train yourself to sell the leading edge and buy the lagging edge. You want a piece of the rock everywhere, without going overboard in any one area."
But holding out for more is not necessarily the best game plan in the stock market, as investors who took the Nortel elevator all the way up and then back down know all too well.
Taking a profit - even if it ends up being smaller than if you had continued to hold - and occasionally taking your lumps and selling at a loss are part of the discipline of investing. So is rebalancing the asset mix, something a lot of investors should be thinking of doing, if they haven't already, as another surprisingly strong year in equity markets draws to a close.
So far in 2006, the Toronto Stock Exchange is on pace for a fourth consecutive year of double-digit gains, up more than 12 per cent. American, European and Asian exchanges (with the exception of Japan) also have rallied this year.
Anyone with a diversified portfolio and limited exposure to income trusts probably is looking at sizeable gains on paper.
As tempting as it may be to sit tight, some pruning may be in order.
If the portfolio is heavily weighted in Canadian equities, a shift toward fixed-income investments and/or foreign equities may be advisable. The high Canadian dollar makes this an attractive time to acquire foreign assets, and there's no longer a restriction on foreign content in RRSPs, though few analysts appear to be recommending foreign weightings much larger than the former limit of 30 per cent.
Gavin Graham, chief investment officer of the Guardian Group of Funds, is wary of the U.S. market, which he said is closely correlated with Canada, with potential currency downside as a further complication.
"If you're worried about the U.S. dollar, and you probably should be, we think Europe is a good place to be," he said.
Asia also is an option, though it's not obvious either market will outdo Canada in the near term, he said.
"Take some profits, sure, but don't sell everything just because Canada has gone up a lot. Why will Canada do worse than a (mutual) fund with big exposure to the U.S. consumer? Is the resource boom over?"
Financial adviser Adrian Mastracci of KCM Wealth Management sees the economic slowdown in the U.S. inevitably having repercussions on high-flying Canadian stocks.
"You have to sell some of the winners. People hate to do it, but the timing is right. We've got high prices," he said.
Mastracci says investors should get in the habit of selling part of their holding in any stock that appreciates a specific percentage. But they have to be just as ruthless reducing (or eliminating) their position in stocks headed the other way.
"Most people freeze like a deer in the headlights when (a stock) goes down. It's unpleasant," he said.
"People have a need to be right. I say, they have a need to do the right thing. You're not going to be right all the time. Being right more often than not is what portfolio management is all about. And protecting the downside is where managers show their true colours."
Mastracci said too many investors have a random collection of stocks and mutual funds or multiple RRSPs and no clear idea where they're going with them.
"In my view, it's both prudent and sensible strategy for every investor to take full advantage of today's markets and whisk the investment portfolio in order," he said.
"Train yourself to sell the leading edge and buy the lagging edge. You want a piece of the rock everywhere, without going overboard in any one area. I'm not clever enough to predict market direction with any accuracy. However, I'm certain that revisiting the investment mix makes sense now."
Rebalancing doesn't necessarily mean selling something.
It could also mean directing new money into bonds or other fixed-income instruments to restore the targeted ratio with equities.
Those in or near retirement may want to lock in equity gains and redirect funds to more conservative investments to preserve capital.
"Selling some equities is sensible for many," Mastracci said. "A touch of selling high is a good practice to rediscover for portfolios laden with stocks and mutual funds. It reduces portfolio risk and helps diversification."
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