BY FAZAAD BACCHUS
As you read today’s article perhaps your focus and thoughts are still on the US election and the surprise it had for most voters and the world at large. During the tallying and announcement of the results the reporter slipped in that the Dow has fallen almost 700 points and I wondered what we were in store for.
I figured the next morning I would have to call all my clients to reassure them that things would probably work itself out. I have many clients who are invested in the US Equity Market and I’m sure we were all wondering if the portfolio would fall more than 10% in a short period of three hours. Luckily by the end of the first day markets revived following a very good acceptance speech by Trump. It could have been a catastrophe.
What does this have to do with asset allocation? When you make the decision to invest you need to consider the amount of risk you can tolerate as this will be a reasonable guide to your asset allocation. Your investments are typically divided into three classes: cash, bonds and stocks.
The least risk is with cash and the highest with stocks. Where you have a mix of the three it is generally referred to as an asset allocation fund. However, how much should be in cash or how much should be in stocks is a function for your portfolio manager and your risk tolerance. If the stock market is doing well perhaps your manager will make a larger investment into it and on the contrary if it’s expected to do poorly then more money will go into cash or bonds. For your manager, timing is important.
Many advisors play a safe game by recommending a balanced fund. Typically, a balanced fund has approximately 60% equity and 40% income. These funds while reliable will not perform as well as equity funds when markets are good but will also not lose as much when markets are down. It’s a good middle-of-the-road position to be in and usually carries a low to medium or medium risk.
Equity Funds on the other hand produce a much higher return but are much more volatile. Equity funds generally outperform bonds and income funds in the longer run but it can provide lots of surprises in the short run causing many an investor to sell and at the worst possible time. These funds generally invest in companies’ stocks these and can be either large or small capitalisation. The Canadian small cap funds have done very well over the last seven years.
Those who are near retirement and for those who would like to avoid risk; they should look to invest in income funds. These investments are usually in bonds, treasury bills and preferred shares. The return is usually much less than balanced assets or equity funds but it allows you to sleep much more peacefully at night. A good income fund should be able to get you a steady 3% or 4 % return.
So, if you plan to invest in mutual funds consider where you put your money as this will bring you the best returns or the world of stress. Find a good adviser and work with him.