One of my friends wouldn't even talk to me about money during the latest stock market turmoil.
"You've just spoiled my day," she said. "Please let's talk about something else."
Perhaps her portfolio isn't properly balanced - which led to her imbalanced feelings about her finances.
The most important factor is having enough liquid assets like fixed-income instruments (GICs, bonds) to cover your cash needs - so you don't have to sell equities (or mutual funds, holding stocks, real estate, etc.) when the market is down, and can continue to hold until prices recover.
Another important factor is diversification. If a particular sector or individual stock goes up significantly, for example, that could leave you with too large a proportion of your portfolio in that sector or that stock and therefore overly vulnerable if that sector/stock drops - again, creating an imbalance.
So, how do you maintain the correct balance?
First, ensure the percentages of stocks versus bonds versus real estate versus collectibles and any other instruments are appropriate for your situation at this time.
When your portfolio mix shifts, you can buy or sell to restore the balance - but that can cost you brokerage and other fees, and also tax if the selling produces capital gains outside an RRSP, RRIF, etc.
A less expensive approach is to make new investments in the under-represented areas, and/or planned sales in the over-represented areas. Costs are those you would have paid anyway.
The Investment Reporter newsletter notes from 1946 through 2012 stocks' compound annual return was 10.5 per cent, government bonds 5.8 per cent, T-bills 4.3 per cent and inflation 3.9 per cent. (That was in the U.S.; Canadian stocks were a bit lower, bonds and T-bills a bit higher.) Best one-year return for stocks was 54 per cent versus worst -43.3 per cent; bonds 43.8 versus -8.1; T-bills 14.7 versus zero.
It's easy to see that accepting more risk over the long term can pay off. But few people can hold investments for 66 years. And that's why it's so important to keep your investments balanced whatever your time horizon.
Mike Grenby is an independent personal financial advisor. Email [email protected]
