Portfolio planning requires a balanced approach

When it comes to investing, it’s important that you invest your time as well as your money. That’s particularly true of portfolio planning.

For example, if you invest solely in Canadian index or exchange-traded funds, your equity portfolio is top-heavy with financial and resource stocks.

The same argument can be applied to many Canadian equity funds, since their managers tend to closely align their portfolios with the indexes. This is known as closet-indexing.

Rather than simply adding new money to such investments right now, I think it’s essential to take the time to determine how much of your assets are invested in each industry sector of the economy. That way, you can add to your investments with the view to creating a portfolio that’s reasonably balanced and diversified by industry sector.

Here are some other ways you can improve your chances of investment success. All you have to do is take the time to apply them.

First, identify your goals. Initially you have to decide what you want your investment program to do for you. For instance, your main goal may be to earn income, along with reasonable protection of your capital.

Or you may aim for long-term growth, and place little emphasis on current income. Younger investors may prefer to speculate. (If you suffer from this urge, it’s best to get it out of your system when you’re young and have less money to lose.)

If you’re like most investors, however, your objectives are apt to include safety as well as long-term growth.

Often, the best way to heighten the safety of your portfolio is by filling it with high-quality investments. But you must decide which objective matters most to you. Otherwise, you’ll fritter away your time, and you won’t profit from the clear direction that brings long-run success.

Here are some more ways to improve your chances of investment success:

■ Once you’ve decided on your objectives, write them down. Many successfully investors report that they did so early in their investing careers. It helps you avoid veering off in fashionable but ultimately unprofitable directions that are poorly suited to your goals or temperament.

■ Keep a checklist. Before you buy an investment, ask yourself some basic questions about it, and write down your answers. What do you hope to gain – income, capital appreciation or both? How great is the risk? This will help clarify reasons for buying it.

■ Tilt the odds in your favour. Follow these two simple rules. First, buy more aggressively when equities are low and hang on. Two, get your cash needs lined up for several years using fixed-income securities. To be really safe, think 10 years. A wise old stock broker we knew once remarked: “It’s easy to make money in the market, if you live long enough.”

■ Keep some cash in reserve. Now is a good time to keep a special cash reserve on hand to be used in the event of a market correction. There are plenty of signs that markets may be setting themselves up for a correction in the near term.

■ Finally, be patient. After you’ve made an investment, give it time to do what you expect of it. If you’re too impatient, the only one who’s likely to get rich is your broker.


The MoneyLetter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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