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Investment strategies for rangebound markets

Tuesday November 22, 2011


Market volatility has increased greatly in the past four years compared with the previous four years. And the big stock indexes have largely been tracing a “sideways” pattern, neither descending into a new bear market nor breaking out in a new bull. That’s not great news for investors and people moving towards retirement, I know. But rather than complaining about the current environment, or worse yet, moving everything to GICs or other forms of fixed income, what can you do to increase your odds of success? Here are several key strategies that that have helped me and my clients, and that may also help you move closer to your goals in our current uncertain markets.

Diversification

Geographic diversification hasn’t provided investors with a “smoother ride” as the world’s main economies have become more closely aligned, but you can still diversify using many other assets that have low correlation to stock markets. Real estate, gold, silver, resource funds are viable options.

The most effective strategy has always been prudent asset allocation – having a decent percentage of your portfolio in fixed income. When I started in the business, fixed income consisted of government/corporate bonds, mortgages, and GICs. Today there are many different types of fixed income assets to provide your portfolio with stability when markets correct. If you are 100% invested in equities, I’d rethink your strategy, unless you are young, understand volatility, and know what “long term” means.

Lower your costs

Your costs as an investor involve trading costs, MERs for mutual funds, and fees charged by financial advisors charge. You can thus trade less, negotiate your fees with your broker/advisor, use mutual funds with lower MERs, and switch to special fund series with lower fees based on higher asset levels (usually $100,000 to 150,000).

Dollar cost averaging

Invest monthly to make sure you don’t buy when markets are trending up or just before they correct. This strategy works for lump sums too. For example, if you have a $100,000 lump sum, you can invest it all in a money market fund but set up the account to invest $5,000 per month, say, in equities or dividend funds.

As long as you are working, you should contribute something to your impending retirement, and this method is the best for the majority of people. If you are married and both spouses work and don’t save anything, review your spending and make some changes to non essentials that will allow savings of at least $200-$300 a month.

Mortgage paydown

It’s always a good idea to lower debt, and paying down your mortgage is no exception. But remember, if you add $10,000 to your RRSP and you are in a high tax bracket, you will save about $3,500 in taxes and have the $10,000 building towards retirement. My only caveat here is that with interest rates at near record lows, your net savings aren’t terribly large, but if you have a huge mortgage or are afraid of stock markets, this is never a bad plan. I prefer having clients invest in their RRSPs first and direct any refund monies to debt reduction (pay highest interest debt, like credit cards, first).

Leverage

Avoid it, unless you can handle extra volatility/stress associated with the strategy, have a secure job, already are maximizing your RRSP contributions, and are preferably mortgage free or close to it. Leverage is the strategy that hurts more people than anything else.

Unscrupulous or greedy financial “advisors” and their firms make a huge amount of money by presenting leverage to unwitting clients, using slick presentations, fancy charts, and graphs that move in only one direction, without fully disclosing the immense risks associated with the strategy. But make no mistake: Leverage is about using borrowed money to invest, and it gives the illusion of increasing your asset base. But only you – never the advisor – will ever be on the hook for repaying the debt if the borrowed investments “don’t work out.”

Dividends

If you don’t want to be fully invested in equities, but aren’t thrilled with low returns for fixed income, dividend stocks and investment funds are an alternative. These will continue to pay dividends regardless of what the market does. Corporate North America is in very good shape now, and dividends are increasingly used to “reward” shareholders. And in fact, over time, a large proportion of the stock market’s total return is derived from dividend payouts.

Marathon investing

Always remember that most financial planning is a marathon, not a sprint. Meet with your financial advisor, decide what financial vehicles will get you where you want to go, and stick with your plan. There are times when you will need to adjust and make changes, of course, but not too many and certainly not during a market correction.

Don’t look at your portfolio too often. For long-term planning, a statement every three or six months is plenty. Looking too frequently will make you sell when you should buy or seek safety when you should get more aggressive.

 

 

 

Generic Mutual Fund Disclaimer

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated.

Personal Opinions & Recommendations Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. However, please call the author to discuss your particular circumstances.


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