Investing firm tool aids in reducing potential for peril
Adjusting your asset mix will help soften risk during turbulent economic times
Tom Bradley is nervous. Maybe too much so, he admits, but he doesn’t apologize for it. One of his top priorities as a money manager is to protect his clients’ assets. If that means forgoing some potential profit to reduce risk, so be it.
Bradley is the co-founder and president of Steadyhand Investment Funds Inc., a small Vancouver-based money management firm that is celebrating its 10th anniversary this year. He has more than 30 years of experience in the invest- ment business, so when he expresses concern about the state of the market, we should pay attention.
“Our managers are really having trouble finding good value right now,” he said last week in an interview. “Valuations are high, and people are too complacent about that.”
His concern has translated into cutting back the equity weighting in the Steadyhand Founders Fund, which he manages himself. It’s a fund-of-funds that invests in the company’s other five offerings: income, equity, global equity, small-cap equity and savings.
As of mid-year, stocks made up 56 per cent of total assets (the target weight is 60 per cent). Since he also sees significant risk in the bond market, that weighting is also down to 25 per cent. He’d rather hold the money in risk-free cash (19 per cent compared to a longterm weighting of 5 per cent).
“What we’re trying to do is soften the risk,” he explains.
Any investor can do the same with his or her own portfolio. It is simply a matter of adjusting asset mix.
The company has a sophisticated and useful tool on its website called the Volatility Meter.
It enables you to look at any year back to 1961 and see how much your investments would have gained or lost, de- pending on the asset mix you applied.
For example, in the crash year of 2008, a blended portfolio (Canada plus international) that was 70 per cent in stocks and 30 per cent in fixed income would have dropped 18.6 per cent. But if those percentages were reversed, the loss would have been only 4.4 per cent.
Diversification also helps reduce the losses in tough markets. An all-Canadian portfolio that was 70 per cent in stocks and 30 per cent fixed income would have lost 21.2 per cent in 2008.
A global portfolio would have been down only 15.9 per cent.
You can run your own numbers by going to steadyhand.com/education/volatility, and I suggest you do so. It’s a real eye-opener and it may prompt you to make some changes in your own asset mix.
But don’t be too extreme. Bradley never advises getting out of the stock market entirely.
“Anyone who does that faces the very tough decision of when to get back in,” he says. “Some people who got out in 2008, never returned and they missed the best market run of this century.”
Rather, investors should be seeking to reduce risk, not eliminate it. “People should prepare for the down years in the market. They will always happen — it’s when, not if. We don’t know when the good is coming, and we don’t know when the bad is. So be prepared and stick to your plan, whatever happens.”
Of course, that’s assuming you have a plan. A lot of people don’t. They contribute to an RRSP for the tax refund or put money into a Tax-Free Savings Account without really thinking through their longterm goals or how to manage the money to achieve them.
“If you don’t have a plan now, make one or get someone to do it for you,” he suggests. “It’s not just a case of managing money. It’s managing behaviour as well.” Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.