Asset allocation for the strategic investor

As we enter the second half of 2015, we are maintaining the asset allocation advice we’ve had in place for some time now. To start with, we recommend you continue to hold a minimum of cash.

Every portfolio needs and inevitably will have some amount of cash. This cash accumulates from interest, dividend and distribution payments as well as matured bonds and the proceeds from the sale of securities.

It’s sensible to let this cash build up until there is enough to efficiently deploy it into a new security position. Cash is also needed to pay commissions, portfolio management fees and other administrative items.

Some investors also hold a strategic amount of cash, either because they expect negative returns from fixed income or equities, or simply because the latter two markets are too volatile at that time for their tastes. This strategic cash, therefore, serves to lessen exposure to unattractive returns or simply to tamp down risk.

In our opinion, a strategic cash component is not needed right now and, with cash returns being so low, only a minimum administrative amount of cash should be held. We recommend you put a maximum of one per cent of your investment portfolio in cash, and we advise you hold this cash in a TFSA. The total cumulative contribution limit is now $41,000, which should be more than sufficient for most investors.

Fixed income allocation should be 40 per cent

We recommend that 40 per cent of a balanced investor’s portfolio be allocated to fixed-income securities, including cash, and that this 40 per cent be divided between government bonds and corporate issues, with a slightly higher allocation to corporates.

To improve the yield on the government portion you might consider provincial issues, and to improve the yield on the corporate portion you might consider straight preferred shares (outside a registered plan) or preferred securities (inside a plan such as an RRSP).

As interest rates get closer to rising we may give even more emphasis to corporates, but for now our recommendation is to give a slight emphasis to corporates. We also recommend an average term to maturity of around three years to gain you a little more return without exposing you to undue risk.

Equities allocation should be 60 per cent

We don’t see equities performing better in 2015 than they did in 2014, but we still recommend a 60-per-cent allocation to equities. A balanced investor might maintain about two-thirds of that in Canadian equities, and the remainder could be evenly split between U.S. equities and international equities.

You can invest in the latter two by using some of the mutual funds we follow regularly in this advisory. And for Canadian equities, how much you hold in our recommended common stocks and how much in our income stocks and trusts will depend on your risk tolerance. And above all, stay invested!

Stock markets are up—but barely

The S&P/TSX Composite Index is up modestly in the first half of the year. The gain is just about one per cent.

More money is now being made south of the border, but not by much. The Dow Jones Industrial Average is up about one per cent in the same time frame but the S&P 500 is up about two per cent.

When will they ever learn? When will they ever learn?

In times of low and diminishing returns, exasperated investors may be tempted to seek out better offerings. We won’t try to discourage you from looking, but remember: “If it sounds too good to be true, then it probably is.”

So why is it that some people always fall victim to someone offering returns that are too good to be true?

We’ve all heard of Bernie Madoff, who was insanely good at picking stocks, until it turned out that he actually wasn’t.

Charles Ponzi had a secret and unbeatable mathematical formula for making money: a formula that he didn’t really have.

Perhaps the most audacious was Gregor MacGregor, who from 1822 to 1826 actually sold an entire country that didn’t exist.

Seriously! He sold bonds issued by this country called Poyais that paid six per cent when equivalent bonds were paying three per cent. The non-existent but abundant resources would more than cover the non-existent bonds. But MacGregor went further.

He sold his fellow Scots land rights to this country, which was supposed to be somewhere near Honduras. He sold them titles such as Official Shoemaker of Poyais. He even got 250 settlers to pay him to let them travel to Poyais. The settlers went, couldn’t find the country, settled where they landed anyway, and never came back to Scotland.

Remember: “If it sounds too good to be true ….”


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

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