The ten things investors should know.

As I consider what to address in each of my columns, I often go back through the dozens of pieces that I’ve written through the years, looking for the themes that have been covered off and those that could use a fresh perspective.

It recently occurred to me that readers might benefit from a bit of a recap on the broader ideas and some specific conclusions that I’ve drawn as a result. And so, at the risk of repeating what I’ve written in the past, here are the 10 take- aways that I think are most useful, broken down into three main categories:

PORTFOLIO CONSTRUCTION IN A POST- CRISIS WORLD

1. Avoid Losses

Since the key to capital preservation is to avoid losses rather than focusing on outsized gains, investors ought to spend the bulk of their time worrying about the likelihood of losses in their portfolio and the magnitude of these losses were they to occur. In the absence of an unlimited time horizon, all investors should be willing to forgo higher returns in exchange for lowering the risk of compound losses.

2. There’s no such thing as a “hold”

In an investment landscape in which there are many i nvestments f rom which to choose, t here should be no such thing as a hold recommendation. Treat your portfolio l i ke something that you are re- buying every time you review it. Subject to some key tax and liquidity considerations, keep investments that you would buy if you didn’t already own them. Buy investments that you want but don’t have. And sell investments you own that you wouldn’t buy if you didn’t already own them.

3. Taxes are real

We live in a world in which investment managers charge for their services and the Canada Revenue Agency is your partner on every financial transaction. All investment decisions should therefore be made considering net-of- fee, after- tax returns. A tie should always go to the cheapest, most liquid, and most tax efficient option. In some cases, however, just because an investment is both expensive and not tax efficient should not eliminate it from serious consideration. It is possible to find excellent investments on a net- net basis t hat are expensive from both a management fee and tax perspective and therefore worthy of inclusion in your portfolio.

4. Diversification works

Although so- called “Modern Portfolio Theory” makes too many assumptions for its general application to be very beneficial 60 years after it was introduced, the power of diversification — one of MPT’s main tenets — is as relevant today as it was then. Indeed, when uncorrelated investments are included in an investment portfolio, the results can often lead to the “free lunch” of higher returns over time with less volatility.

THE ROLE OF ALTERNATIVE INVESTMENTS

5. Defining Alternative

While everyone seems to have their own interpretation of what “alternative” means, the key private investments that might add real diversity and higher risk- adjusted returns to a portfolio are real estate equity, mortgages, private equity and private debt. These investments are all also accessible through the public markets, however the added liquidity provided in the public markets can be offset by the higher correlation and volatility that being publicly-traded implies.

6. Liquidity matters

When assessing the liquidity of units in an investment fund, investors must concentrate not only of the liquidity of the units themselves ( i. e. monthly or quarterly with or without a lockup) but also the liquidity of the underlying assets. For example, a private real estate fund might offer redemptions to its investors on a quarterly basis, but if everyone wants out at the same time, this race for the exits could result in a delay of months (or even years) before investors are able to get their money out. As a result of the potential hazards of less liquidity, investors must convince themselves that they are well- rewarded for taking on liquidity risk in the first place.

7. Choose hedge funds wisely

Mostly because of the high fees they charge, hedge funds get a lot of bad press. In cases where “impostor” hedge funds use leverage and derivatives to increase returns rather than manage risk, this criticism is often well- deserved. In other cases, legitimate hedge fund

PUT TOUGH BUT IMPORTANT QUESTIONS TO YOUR ADVISER.

managers are assiduous in protecting capital, engaging in complex strategies aimed primarily at managing risk, often giving up outsized returns in exchange for muted losses in unfavourable markets. It is these funds that ought to be considered for your portfolio.

YOU AND YOUR FINANCIAL ADVISER

8. Understand your portfolio

No matter how experienced your adviser or how l i mited your own knowledge, it is your money at stake and you must do some work to help protect it. This work takes many forms, but the absolute minimum requirement is that you seek to understand how your portfolio is designed to help you meet your specific objectives and not put together with a simple cookie- cutter approach to allocation.

9. Not all advisers are created equal

As shocking and disturbing as it may be to most investors, most advisers in Canada do not have a legal requirement to act in your best interest. You can overcome this shortcoming by working with an adviser who owes you a fiduciary duty at law ( such as a registered Portfolio Manager in a discretionary account) or by asking tough but important questions to your adviser surrounding their total compensation and any conflicts of interest that could affect the nature or quality of advice they give you.

10. A good adviser is worth it

Notwithstanding t he above two points, a good adviser is an integral ingredient to you achieving your financial goals and worth the fees they charge you. Although sometimes hard to find, good advisers will do a lot of the heavy lifting on your behalf, allowing you to live the life you had hoped would result from so many years of hard work rather than finding yourself undercapitalized at exactly the wrong time of your life.

David Kaufman is president of Westcourt Capital Corp., a portfolio manager specializing in traditional and alternative asset classes and investment strategies. He can be contacted at drk@westcourtcapital.com.