A few weeks ago, our company 5i Research launched a new portfolio analytics service, allowing customers to ascertain their investment goals, income needs, risk parameters and other factors, and to determine whether their current portfolio is set up properly to meet these personalized goals. Whether it is for a ‘second opinion’ on a broker-advised portfolio or someone who is a true ‘do it yourselfer’, many investors simply need some more advice in how to set up a portfolio properly. Even in only a few weeks of operations, we have already noticed some common trends in our clients’ portfolios. Our bet is some of these might apply to you as well.
Spend more money
Most brokers and fund companies wantmoreof your money to invest, because of course, fees. However, many baby boomers these days are in excellent financial shape. They have worked, saved and invested. Some have solid pensions (see below). Many of these investors, if one was to give a completely unbiased opinion, should beinvesting
more. Take that trip, give money to your kids, donate to that charity: Most Canadians dramatically overestimate how much money they are going to need for their retirement. Many investors have giant portfolios that do nothing but grow bigger each year. Now, no one wants to run out of money. But most everyone wants to have more fun. Spend a little.
Too many small and insignificant security positions
We get it, no one likes to take a loss. But is there any point in keeping a 0.3 per cent position in a stock in your portfolio? Think about it: That stock could quadruple and its impact on your portfolio wouldn’t even be more than six months’ worth of dividends on some companies. And — admit it — you know it’s probably not going to quadruple. Sell your losing, small positions. Clean up your portfolio, take a tax loss, and buy something better.
Too much invested in Canada
Investors who spend in Canada do need to be worried about currency risks. But Canada represents less than five per cent of world capital markets. Is there any need to be 80 per cent invested in your own country? Most investors do have a ‘home-bias’ and like to buy what they know. But having too many assets in Canada causes you to miss out on faster growth internationally, and on companies you just can’t get good representation from within Canada. The healthcare and tech sector are good examples. Sure, Canada has a handful of good companies in these sectors. Looking internationally, though, you’ll find hundreds, in all sorts of market caps and with all sorts of growth potential. Diversify more internationally and reap the benefits.
No consideration of pension
This a common problem we see. Many investors, lucky for them, have solid pension plans. Yet many fail to consider this when they are setting up their portfolio’s asset allocation mix. We can argue that, with a solid pension covering most if not all of your ongoing spending needs, an investor might not need any fixed income exposure in their portfolio at all. Sure, a larger allocation to stocks ‘looks’ riskier, but when you have that steady pension cash flow coming in month after month, you can withstand more market volatility. If your pension exceeds your expenses, you can even buymorestocks each month with the difference and get even greater potential compounded returns.
Too many banks and dividend stocks
We know (most) investors like the banks, and we know that all investors love dividends. We will be brief, as we know Canadians are overweight the financial sector. If you layer on exposure through ETFs and mutual funds, we might dare to say Canadians have way too much exposure to banks. Now, unlike others shorting the sector we are not particularly planning for a downturn, but having 30 per cent, 40 per cent or 50 per cent ofanysector is never a good idea. Now, you might say, ‘It’s OK I also own telecoms, utilities and pipeline stocks.’ But, in many market cycles,alldividend stocks move in tandem. Thus, you might only have 25 per cent in banks, but you might have 55 per cent overall in dividend stocks. Maybe think about some growth exposure as well, or non-dividend stocks that allow you to defer taxes and (likely) pay lower taxes than dividends upon their sale.
Peter Hodson, CFA, isFounder and Head of Researchof 5i Research Inc., an independent research network providing conflict-free advice to individual investors (http://www.5iresearch.ca).