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Diversify your overall portfolio

HOW can investors protect their portfolios and reduce risk but be ready to capitalize should opportunities present themselves? This is a difficult conundrum with countries such as Greece defaulting, Italy and Spain well on their way, and the U.S.

HOW can investors protect their portfolios and reduce risk but be ready to capitalize should opportunities present themselves?

This is a difficult conundrum with countries such as Greece defaulting, Italy and Spain well on their way, and the U.S. increasing its debt, which has led to a downgrade by Standard & Poor's to AA+.

The markets will always have rallies and corrections (this a guarantee in life along with death and taxes!) and as such, proper diversification becomes extremely important when managing portfolios.

Many investors hear financial gurus speak of diversification in terms of how much in stocks or bonds they should have, but many don't speak of the benefits of including various investment managers with strategies that complement each other but provide diversification to your overall portfolio.

There are many financial advisors, banks and fund companies that only recommend their clients invest in their own products. In fact, many are unable to recommend anything else even if there is a better alternative! In my opinion, this restriction is a massive disservice. How likely are they to recommend selling their own product in times of volatility even when there may be other managers out there that have performed much better and are actively trying to reduce risk during turbulent markets?

As an associate portfolio manager, I directly manage client portfolios, advising them on asset allocation, income needs, estate planning and, of course, providing stock and bond recommendations.

I know that no investment manager will be right 100 per cent of the time and therefore I feel it is vital that my clients' portfolios also have diversification through exposure to some of the top managers in Canada. This allows clients to have all their assets under one umbrella with one advisor steering the ship, yet be diversified by adding other strategies that complement each other.

There are almost 2,000 professional investment managers looking after more than 12,000 portfolios and I feel that most are not worth the fee they are paid. Many funds have become too large to actively trade so they basically buy the same stocks as the index in which they are benchmarked against. This results in performance that is never really any better than the index, or worse for that matter, while you are paying them two to 2.5 per cent to "manage" the stocks and risk in the fund.

From our extensive research, we have narrowed it down to four money managers (Barometer Capital, Vertex One, Sentry Investments and Picton Mahoney) that do have a solid approach to minimizing risk during turbulent markets while waiting for opportunities to present themselves. These managers are not buying the index, but coming up with their own ideas when actively managing portfolios, and they all believe buy and hold will not work in this market.

So in addition to managing our clients' stocks and bonds directly, we will add these managers, increasing the

level of diversification without reducing the expected returns.

As markets have declined, most investors will be reviewing their overall strategy. You should ensure that you are diversified, not only in stocks or bonds and various sectors, but also include some of top ranked investment managers. And make sure that your financial advisor is able to recommend other products than their own, especially if they are underperforming. lori.pinkowski@raymondjames.ca.