The “Classic” 60/40 Portfolio
Basically, this portfolio is constructed with a mix of 60% stocks, 40% bonds. The theory (or selling feature) is that this is a pension-style approach. You are presented with upside growth opportunity with stocks, safety and income with bonds.
• Significant volatility – During the 2008 liquidity crisis, many “balanced” funds ended the year down 20%, 30%, or more.
• In a low interest rate environment, bonds may not provide adequate income, and may lose value if rates start to rise.
• Little to no inflation protection.
The “100% Equities for Everyone” Portfolio
This idea, espoused by some advisors, is that the only way to true investing wealth and security is to go “all in” to the stock market. The highest returns over you investing lifetime will be made in the equity markets, they advise.
• Investing Near the Top – You are most likely to be attracted to this idea when recent stock market returns have been good. Therefore, the tendency is to buy high, potentially hurting returns.
• Long Bear Markets – There have been time periods of 18-20 years in which the market has failed to gain, start to finish. If you are 50 today, are you willing to wait until age 70 before your equities start gaining?
• The “Pillow Effect”- Most investors cannot psychologically take the stress of seeing all of their hard-earned money fluctuate up and down so much on a daily basis. Giving up sound sleep is no way to invest.
100% Private Exempt Market Products
Some exempt market sales representatives will tout all of the high income and growth potential in their products, and see no problem with you placing your entire portfolio into their selection. Why make 3% in GICs when you can make 8% in our products, they ask? The temptation of high returns can be difficult to resist.
• Risk – While risk may vary amongst offerings, regulators view the entire category as high risk. These products should never be compared to GICs. It’s like comparing a hammer to a saw, different tools for a different job.
• High Expectations That are Not Sustainable – A few years ago, many lending strategies such as Mortgage Investment Corps (MICs), offered high yields of, say, 8% per annum, paid monthly. Recently, we have witnessed a great deal of competition amongst lenders, causing rates to lower. So an 8% rate could change to 5% overnight.
• The “Blow-Up” Factor – Selecting exempt market products could be appropriately compared to navigating your way through a minefield. By yourself, with no equipment to detect the mines, the chances of stepping on one, and causing significant injury, are fairly high. When selecting exempt market products, the same is true. Without an experienced team of professionals to guide you, there is a reasonable chance that your product will not turn out as expected, and perhaps even go to zero.
Markets Made You Afraid? Just Put Everything HERE
After a significant drop in the markets, many investors are naturally afraid of continuing losses which could wipe out everything. So their insurance-license advisor recommends they place their entire portfolio into a Guaranteed Retirement Product (some of them end with a “plus” for example). The sales pitch is that you are guaranteed income for life, and you will never lose your principle.
• Extremely High Fees – The annual fee can be 3 or 3.5%, which is huge, and lowers your return.
• The Guarantee May Not be Worth It – A product that guarantees you against any losses over 10 years is normally not necessary, as it is less likely the product will be below your original amount invested over that time.
• Terrible Timing – The time your advisor should have recommended this product was before the correction, when the markets were high, not after. You are essentially locking-in losses, and lowering your upside when markets recover, the worst possible combination. As it turns out, since the great 2008 correction, markets have recovered significantly. Anyone who purchased these products close to the bottom missed out.
• Commissions – Perhaps you were so afraid of losing your money that you failed to realize that your advisor just “double-dipped”! He/She was paid handsomely when you implemented the first portfolio, and then paid a big fat commission cheque again when you bought the “Plus-type” product. Great for the firm, great for the advisor, not so great for you, the investor. If there ever was an instance of financial malpractice, this would be it.
Now that you know what to look for, ask yourself: “Do any of the above categories apply to me?”
One huge potential problem is that your banker is paid to sell GICs and mutuals, your broker stocks and bonds, your insurance advisor insurance products, and your exempt market representative private products (to be accurate, I am being simplistic, there is some overlap). Since many financial service professionals represent and are paid for selling their branded products, they either do not have familiarity with other categories, or have no interest in seeing your money go elsewhere.
It would be a tremendous benefit to you, the investor, if you received guidance from someone who is familiar with many product types, and can recognize when an outside party is required. Many times, the suggestion to keep everything “in-house” can cost you financially.
A Reasonable Solution
Now that we have seen a number of all-to-common ways that an investor can misallocate their investment assets, let’s discuss a strategy that can help you accomplish the following:
i. Reduce stock market volatility, reducing stress
ii. Create safety and guarantees, allowing you to sleep well at night knowing your money is safe
iii. Provide for market growth, which you want to participate in
iv. Protecting your portfolio against inflation, so you can keep spending and avoid lowering your standard of living
v. Make the process simple and easy to understand
One of the first discussions I always have with a client focuses on safety. You want to make sure an appropriate amount of dollars are allocated towards guaranteed investments, such as GICs, government bonds, annuities, and other, similar instruments. This assures you that, no matter what happens, you are able to sleep well knowing that money is there. That feeling of security is powerful.
Next, having a suitable mix of public stocks and bonds can provide for growth as well as safety, income, and diversification. These are important ingredients in a properly designed portfolio.
Lastly, an appropriate allocation to select private exempt market opportunities, containing real asset investments, can serve to stabilize your portfolio, protect you from the eroding effects of inflation, and can possibly be the “saviour” of your portfolio in times of financial crisis. I recently watched a video where famous billionaire investor Michael Lee-Chin (founder of AIC mutual funds) explains that, during the 2008 crisis, the part of his portfolio that saved him were his private investments.