Skip to content

Managing portfolios in tough times

STOCK markets have been volatile for months now and investors are becoming increasingly nervous. When times are uncertain it seems that many investors want to hide their money under their mattresses.

STOCK markets have been volatile for months now and investors are becoming increasingly nervous.

When times are uncertain it seems that many investors want to hide their money under their mattresses.

Leading up to October, the stock market declined for seven straight months as numerous global events continued to pound investors. We have experienced many new situations that investors have never seen before such as the earthquake in Japan and possible nuclear meltdown, the Middle East uprisings and the possibility of the European Union folding, not to mention the U.S. congress not working together in order to raise their debt ceiling followed by a downgrade for the U.S. for the first time in history.

October was the first positive month for the Toronto Stock Exchange since February of this year, gaining back 5.4 per cent since the end of September. Although the market is still down year to date, investors felt a bit of relief for the first time in months.

So, with all this volatility, how should investors manage risk in their portfolios so they can sleep at night?

There are some guidelines that we follow when managing client portfolios during difficult periods: 1) Reduce exposure to stocks in volatile sectors. There are certain stocks that are much more volatile than others and can be dangerous to hold in this type of market. Areas such as mining, oil and gas and agriculture for instance can be hit quite hard during market corrections, especially if they don't pay high dividends. If you are worried about the volatility and you don't like seeing your portfolio value change much month to month, then you may want to limit your exposure to these sectors.

2) Hold more cash and fixed income. It is important for investors who are nervous about the markets to hold higher amounts of cash than normal. Investors should also consider moving funds into fixed income so they can increase their return. Cash and high interest savings currently only earn about 1.50 per cent, therefore this is not where you want to keep your money long-term.

3) Hold more dividend paying stocks in your equity allocation. These stocks tend to be less volatile and can provide excellent income for your portfolio. This doesn't mean you have to just hold bank stocks (We don't hold any right now because we view this sector as having higher risk at this time). There are numerous other sectors in the market that have done well and pay great dividends. For example, areas such as utilities, pipelines, REITs and telecommunications stocks can pay dividends as high as six per cent!

4) Have stop losses in place so that if negative news hits the markets without warning, you have a plan to raise more cash. This active approach allows clients to sleep at night knowing we will take action and not sit idly by if the stock market gets worse.

5) Recognize when the trend changes. There is no green light to tell us when to get back into the markets but investors do need to look forward instead of backwards. Looking forward will allow you to see the signs that indicate change is happening. It does appear that we have seen a short term bottom of the TSX on Oct. 4 and it is imperative that we, as portfolio managers, recognize this so that we can put money back to work. When markets begin moving higher again, it may go unnoticed initially because the media is often still talking about yesterday's bad news. One must notice the moves in leading economic indicators as well as confidence settling back into the markets before the herd does. Markets move quickly and you need a game plan to reinvest at a good time.

With current market conditions investors may have anxiety and become understandably emotional over their investments. If managed properly with diversification and active management, investments can still yield higher returns than sitting in cashable GICs or money market. We do not believe the volatility we've seen is likely to subside over the next year; therefore a proper plan and a more active approach is necessary in order to see portfolio growth.

Lori Pinkowski is a Portfolio Manager and Senior Vice President (PCG) at Raymond James, member CIPF. She is also a financial commentator on CKNW every Friday at 5: 35 p.m.