HOW can you make sure that your portfolio is being managed successfully and earning a good return through these uncertain market conditions?
It's called risk management. There are some rules that we follow when managing investor portfolios because managing risk is most important when markets are volatile. The following are some vital principles that we follow to give investors peace of mind during these turbulent times.
- Focus on dividend paying stocks. You can get about five per cent in dividends from various stocks and sectors in Canada. These stocks tend to be less volatile, so including them in your portfolio will help increase returns while reducing your portfolio fluctuations.
- Rotate sectors when needed. Sectors such as oil, gold and financials don't always go up so it is important to steer your portfolio in the direction of the market that is working. Markets move in cycles and it is important to position yourself to take advantage of that.
- Diversification of managers. It is important to have one financial advisor steering your financial ship, so to speak, but it is vital that they diversify you in various managers. No one is right 100 per cent of the time or can specialize in all areas, so use a few portfolio managers for the best results.
- Use stop losses. Markets can change direction at any time. You need to have a plan in place to deal with these changes and this is why we use stop loss alerts. This means that if a stock moves lower than a predetermined price, we sell it.
- Increase cash positions if the market direction is unclear. Cash is king when markets are extremely volatile or moving lower. Cash should not be a long-term investment but it should be used for safety in your portfolio. You don't need to be invested all the time.
- Be disciplined. Have a plan and stick to it so you don't panic and do the wrong things when markets go down. One thing is guaranteed in investing and that is there will always be bull and bear markets and you need to stay disciplined to your strategy.
Lori Pinkowski is an associate portfolio manager and senior vice president, private client group, at Raymond James Ltd. This column is for informational purposes only and does not necessarily reflect the opinions of Raymond James.