Time to review your asset allocation

Here’s our most recent advice on allocating your assets for the markets we expect to transpire over the next several quarters. Some investors maintain a normal asset allocation during all types of markets. But you may enhance your returns by tilting your portfolio based on reasonable expectations.

Asset_AllocationLet’s start with your allocation to cash. We recommend a slight overweight in cash right now at three per cent of your overall investment portfolio. A benchmark weighting would be two per cent within a standard range of zero to 15 per cent. Outside your investment portfolio, of course, you would want to hold enough cash to deal with any emergency that could occur over the next six to 12 months.

Fixed-income securities

For your fixed-income securities, which includes both bonds and preferreds (the proportion between each partly dependent on how much you hold in regular or registered accounts), we recommend an under-weighting overall. For a balanced portfolio that would be 37 per cent. More conservative investors might want to go as high as 60 per cent cash and fixed income.

With interest rates likely headed higher, a reduced allocation is called for. Plus, we recommend shortening the average duration of the bonds you do hold. And we recommend floating rate preferred shares over straight preferreds.

Use mutual funds for foreign stocks

For your equity component, we recommend international and emerging markets now. You can gain exposure to these markets through our recommended mutual funds. In particular, we like Mawer International Equity for exposure to markets outside the US and RBC Emerging Markets Equity for its focus on developing economies. Continue to hold any US equities you may own.

Canadian stocks and income trusts

That leaves Canadian equities and Canadian income trusts, which we believe should make up most of your equity component if you reside in this country. In particular, we recommend you emphasize financial stocks, consumer stocks and resource stocks over utilities right now, as rising interest rates may make the latter even cheaper in the near term.

Some investors maintain a normal asset allocation during all types of markets. But you may enhance your returns by tilting your portfolio based on reasonable expectations.

Cut your risk

From time to time we hear from friends who want to know how they can eliminate the risk of investing in equities. We’ve yet to find a way to remove all the risks of investing. But there are three ways you can reduce your risk.

■ Emphasize quality. Prudent investors buy mostly stocks and mutual funds we rate ‘Conservative’ or ‘Very Conservative’. These include most of our recommended mutual funds and all of our recommended common stocks. These stocks have the underlying asset value to survive longer in a general setback. They often bounce back faster when stocks in general go up as well.

■ Beware cyclical stocks. Stocks that go through up and down cycles in their earnings often have dividend records that are just as erratic. Buy cyclicals, such as resource stocks, sparingly—especially if you rely on dividends for income.

■ Include dividend stocks and funds in your portfolio. A long record of dividend payments is no guarantee that a firm will keep paying dividends in the future. But a dividend provides a clue to the health of a company. After all, it can only pay dividends out of earnings or retained earnings. When you include dividend securities in your portfolio, therefore, you’re generally investing in some of the least riskiest stocks in the market.

This is an edited version of an article that was originally published for subscribers in the June 15, 2018, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.

Money Reporter, MPL Communications Inc.
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