All posts by Adrian Mastracci

Regain portfolio control amid market mayhem

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“To conquer fear is the beginning of wisdom.”
—Bertrand Russell (1872–1970), British philosopher

Investors have been enjoying the fruits of rising markets. A nine-year upside since the March 2009 lows, to be more precise. Conventional wisdom expected that stocks continue to deliver as economic conditions are likely to remain healthy.

Suddenly, everyone is wallowing in fears. Worries about global economies, recurring volatility and market jitters are back on stage. Investors are wondering what to do with the nest egg amid the crazy mayhem.

“Markets can’t be managed, so focus on your interaction with the markets.”

I recommend that you act wisely. Move slowly. Don’t give up. Don’t throw in your towels. The solution is simpler than you think.

Repeat after me: “I am not in control of my nest egg – the stock and bond markets are.” This is your first and most important admission.

Expect market corrections and surprises any time. Market mayhem is a normal occurrence, in both directions. You’ll be afforded little time, if any, to react. Fretting and worrying about the volatility does not help anyone. Your task is to regain as much control as possible.

Recent market haircuts are graphic reminders of the curve balls of investing. Zeroing in on simple practices reduces the hazards of stepping in a sink hole along your investing roadway.

Adopted Wisdom

I have adopted these timeless steps. You should too:

  • What matters most is how the portfolio fares, not the market outcomes.
  • Markets can’t be managed, so focus on your interactions with the markets.

Continue Reading…

Rattled by the “Correction?” Diversification keeps your nest egg on the rails

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“I know not what the future holds, but I know who holds the future.”
—Homer

We are all aware that portfolio winners rotate position from time to time. Leaders have a habit of becoming laggards. “Must own” darlings become “forgotten” names. Winners vacate the “winner’s circle.” As the timeless saying preaches, don’t put all your eggs in the same basket. Hopefully, this classic advice is being followed.

“Diversification strategies are essential, time-tested tools for every nest egg.”

The main goal of investment diversification is to contain the damages of market volatility from being inflicted on the nest egg. The importance of this is fundamental and always in fashion. I highlight some key observations on portfolio diversification:

  • Investment portfolios suffer from inadequate diversification.
  • Mutual funds we own often have the same, or similar, stocks.
  • Investors are not aware that they lack diversification.

Diversification strategies are essential, time-tested tools for every nest egg. They improve your chances of achieving better consistency of long-term returns. It’s a focus for every investor to prioritize.

Basic diversification involves spreading your risks across different sectors of the economy. All within the asset allocation targets set by your investment plan of action. Make sure that you are comfortable with the approach so that you don’t have to dwell on regrets. Portfolios I review range from too concentrated to well over diversified.

Overall, diversification is a necessary safeguard. You don’t want problems arising in any asset class to ruin your well-designed portfolio. Especially the one that delivers the family’s retirement cash flow.

Develop sound habits

Diversification increases the odds of you being right more often than wrong. When some selections are suffering, others can step up and help cushion the rest of the portfolio.

Make it your habit to keep your nest egg from slipping off the rails. I summarize my top ways to achieve necessary portfolio diversification:

  • Asset Classes: Choosing different asset classes for the game plan is a sensible and prudent step. Stocks, bonds, cash, commodities and real estate are common picks.
  • Economic Regions: Portfolios may include selections from Canada and other regions around the world. Like the USA, Europe, Far East and emerging countries.
  • Time to Maturity: A portion of the portfolio could have a range of investment maturities. From as short as 30 days to as long as 30 years.
  • Foreign Currencies: Investment selections can be purchased in currencies other than Canadian funds. Such as US dollars, the Euro or hedged to our Loonie.
  • Investment Quality: High investment quality trumps reaching out for questionable yield. Trading quality for higher yields increases the potential to incur large losses.

Portfolios ought to contain a variety of investments that don’t all move in unison. However, seasoned investors know full well that is not always possible.

Broad brush

My table below is far from scientific. Look upon it as a broad brush view of portfolios that own Exchange Traded Funds (ETFs) and/or mutual funds as their primary investments in equities. Each investment selection is referenced as a “basket.” I divide the diversification landscape into three ballparks. Continue Reading…

RRSP Strategies for 2018

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“When you retire, think and act as if you were stil working. When you’re still working, think and act a bit as if you were already retired.”
— Author Unknown

First, a few words about my overall approach: “I recommend growing the RRSP wisely and sensibly over the long haul. It delivers very well during the decades of retirement income needs. My 2018 strategies offer vital RRSP planning ideas for everyone.”

RRSPs have grown substantially, many exceeding values of $500,000 to $1,000,000 for a family unit. Also consider that various investors own the RRSP’s financial cousin, a flavour of the Locked-In Retirement Account (LIRA). Such a plan is typically created when the commuted value of an employer pension is transferred to a locked-in account. LIRA values can easily range from $200,000 to $400,000. Although, RRSP deposits cannot be made to a LIRA, the account needs to be invested alongside the rest of the nest egg.

Clear understanding of the RRSP regime is essential to guide the multi-year planning marathon.

RRSPs really fit two camps of investors like a glove: those without employer pension plans and the self-employed.

Some investors still shun RRSP deposits. However, my top reason for pursuing the RRSP continues to be long-term, tax-deferred investment growth. It means no income tax is paid until draws are made from the RRSP. This allows the plan to grow for years, often decades.

Stay focused on how the RRSP fits into your total game plan. The power of tax-deferred compounding really delivers. Keep your RRSP mission simple and treat it as a building block. Take every step that improves the money outlasting the family requirements.

I summarize the vital RRSP planning areas:

1.) Closing 2017

Your 2017 RRSP limit is 18% of your 2016 “earned income”, to a maximum of $26,010. This sum is reduced by your pension adjustment from the 2016 employment slip. The allowable RRSP contribution room includes carry-forwards from previous years.

RRSP deposits made by March 01, 2018 can be deducted in your 2017 income tax filing. There is no reason to wait until the last minute where funds are available. Your 2016 Canada Revenue notice of assessment (NOA) outlines the 2017 RRSP room. Continue Reading…

Saving to Retire

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I see too much pessimism on whether it’s possible to achieve a comfortable retirement.

Hence, I highlight three observations on saving for retirement:

  • Surveys frequently remind investors that they don’t save enough for retirement.
  • Investors are keen to know what it takes financially to achieve a comfortable retirement.
  • This is a good time to start the optimistic retirement math discussion.

The number often mentioned is rounding up financial assets of $1,000,000 by age 65. However, accumulating that sum of money may be a tall order for some.

It can be done, but it is not always easy. So, I propose meeting halfway, say at $500,000.

Typical sources of income and capital are the registered accounts, saving accounts, stocks and bonds. Perhaps, income real estate, employer pensions and a family business also fit.

Adding regular savings to your investing plan is simply a must to reach retirement goals. Your degree of financial success has a lifetime of implications.

Assume you begin saving at age 30, 40 or 50 and have no other retirement assets. Here are some annual saving targets to reach $500,000 by age 65 (figures rounded):

Annual Returns to Age 65 Your annual saving targets starting at:
Age 30 Age 40 Age 50
8% $2,900 $6,800 $18,400
7% $3,600 $7,900 $19,900
6% $4,500 $9,100 $21,500
5% $5,600 $10,500 $23,200
4% $6,800 $12,000 $25,000

Say you are age 40, you will need to save $10,500/year to age 65 with 5% returns. That saving target reduces to $7,900/year to your age 65 with 7% returns.

If your aim is to accumulate $250,000, divide the above annual saving targets by two. For the $1,000,000 goal, multiply the above saving targets by two. Continue Reading…

5 sensible steps to improve your 2018 game plan

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“Your future depends on many things, but mostly on you.”
—Frank Tyger (1929–2011), cartoonist, columnist and humourist

Designing the investment plan for the long haul requires much serious thought. Unfortunately, investors shortchange themselves on two fronts. Firstly, they spend far too much time selecting investments. Secondly, and more important, they spend too little time researching and establishing their investment policies and strategies. The ones that the plans should put into effect to reach personal goals.

In my experience, few investors actually have a sensible game plan that is being followed. Too often, this results in a collection of “flavour of the day” investment selections. Designing the appropriate investment plan is essential, particularly the asset mix targets.

“Understanding the major investment risk factors brings perspective to the plan. The ability, willingness and need to take risks are your top three.”

Happily, this situation is easy to rectify. A new year is about to make its grand entrance. Let us take a breather to contemplate a few improvements.

Stewarding the finances is truly a long journey. If you were my client, I would start with this question, “What is important about investing to your family in 2018 and beyond?”

My observation is that many investors opt for preservation of capital. Others focus on portfolio growth. The rest concentrate on the retirement income stream. Lifestyle needs are also high on the pecking order.

I touch on a handful of key steps in designing your game plan:

1.) Retirement prospects

Determine the family’s desired retirement income goal in today’s dollars. Calculate the size of portfolio to reach and sustain the goal. This provides portfolio direction and purpose. Estimate the personal rate of return required to achieve the retirement nest egg ballpark. Then treat that rate of return as the “investment benchmark” for the game plan.

Once the personal rate of return is identified, there is likely no need to incur higher investment risk than necessary. This is especially important to retired investors. Consider all the investment accounts owned as part of the big picture, not in isolation. Revisiting your “asset location” best practices helps fine tune the game plan.

2.) Investor profile

Analyze which type of investor profile suits and feels best. The most familiar ones are labeled as preservation, income, balanced, growth and aggressive. In my experience, investor profiles change infrequently.

The majority of investors are comfortable within 40% to 60% allocated to stocks and the remainder to cash and bond selections. For example, a balanced profile typically allocates about 50% to stocks, 40% to bonds and 10% to cash instruments.

3.) Asset mix 

Asset mix decisions have the greatest impact on portfolio outcomes than any other factor. Studies show that these decisions explain a substantial amount of variations in total portfolio returns. Continue Reading…