Stop chasing the market and grow your family’s wealth with this portfolio strategy

Investors tend to make their biggest mistakes during market extremes and we saw a perfect example of that in December with all the panic selling at the market’s lows, which led many to miss out on one of the best starts to a year in decades. Specifically, the S&P TSX is up more than 12 per cent, the MSCI World Index up over 9 per cent and even bonds are performing well on the expectation for lower interest rates.

That said, there is quite the negative tone out there with investors questioning the sustainability of this market rally. In particular, headline reporting is filled with stories citing a pending global economic slowdown, geopolitical risks such as Brexit, a trade war with China or even our own uncertainty over the impact from a weaker Alberta and the recent sharp drop in housing sales.

Despite having a stronger outlook, surprisingly, it’s not much different south of the border as the gap between equity performance and funds flow (investor buying) into U.S. equities is approaching the widest levels since the financial crisis, according to a Goldman Sachs report and as cited on Bloomberg.

Instead of worrying whether you’ve missed out and if the recovery will continue, both of which are completely out of your control, as an investor you need to focus in on what you can influence — the design and construction of your portfolio and how it relates to your personal goals and objectives.

A great starting point is to review what is actually driving your portfolio returns and then making adjustments for your circumstances rather than just the market conditions at the time (which rebalancing will take care of).

This means shifting toward what the industry calls goals-based benchmarking by determining the target return specific to your personal situation, and keeping track of how well you are achieving it. Unfortunately, many instead focus on trying to keep up to what the market or what others are doing, seeking out so-called “expert” advice in order to attempt to time certain segments of the market, or choosing those financial products with the highest near-term return.

In our opinion, a much better approach is to take a step back from all of the headline reporting and undertake a capital asset forecast meaning taking measure of your estimated forward cash flow that factors in both spending and savings assumptions and how they relate to your portfolio. This will determine a rate of return specific to your situation that is required to meet your goals such as funding your retirement, your children’s education or what you specifically plan to leave behind into your estate.

As a next step, asset allocation decisions are made to minimize the level of risk as much as possible to meet these objectives. So in reviewing your current asset allocation as written up within your Investment Policy Statement, ask about the specific details backstopping your weightings to equities and fixed income and how they tie back to your personal situation.

Finally, look to implement some form of risk-management into the portfolio design and construction process. This means utilizing low-correlated assets and ensuring that you are properly diversified among asset classes, size, geography and style/valuation. Sometimes it pays to keep it simple and look for a mix among global large cap, mid cap, small cap and a bit of REITS optimized for your situation including factoring in tax management. Beware of off-the-shelf allocation and portfolio construction software: no two investors are the same with regard to their goals and objectives, so why should their portfolios be?

If you get to know the reasons why your portfolio looks the way it does, you can stop chasing the market and start growing your family’s wealth.

Martin Pelletier, CFA is a Portfolio Manager and OCIO at TriVest Wealth Counsel Ltd, a Calgary-based private client and institutional investment firm specializing in discretionary risk-managed portfolios as well as investment audit and oversight services.


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