Stung by rate hike? Advisor offers portfolio solutions

Many investors face dilemma over portfolio weighting after Bank of Canada decision

Stung by rate hike? Advisor offers portfolio solutions

The Bank of Canada hiked interest rates yesterday leaving some investors with a dilemma over their fixed-income and equities portfolio weighting.

Jason De Thomasis, an advisor at De Thomas Wealth Management, said the move by Governor Stephen Poloz to raise the benchmark rate to 1.50% should be seen as a positive one as it signals the bank’s confidence in the economy to deal with higher rates, NAFTA and trade concerns, and its ability to control inflation levels, which are at the highest they have been for five years.

De Thomasis admitted, however, that it will have a negative effect on portfolios, particularly those weighted heavier towards fixed income. While the obvious solution may be to re-allocate to equities, he said advisors must be careful this still fits within a client’s risk tolerance.

He suggested other solutions, such as laddered bond portfolios, floating bond rates and laddered preferred shares, ideally via a fund or ETF to keep it simple.

He said: “A move to a heavier weighted equity portfolio may be better positioned to handle rising rates, but it may also put clients into a higher risk category than they are comfortable with.

“However, some may argue that maintaining a heavier weighting in fixed income may expose clients to ‘equity like’ volatility with rising rates. The solution? There are plenty of fixed-income options that provide investors with the opportunity to earn a positive return and do not force them into equities.”

De Thomasis said that a number of providers provide low-cost laddered bond portfolios so an investor does not have to ladder each individual holding on their own, while floating rate bonds offer potential for enhanced income in a rising-rate environment.

He added that for his clients that are primarily fixed income investors, he tries to limit their exposure to longer term bonds or any fixed-income holdings that would be dramatically affected by rate hikes.

He said: “Where clients want equity-like returns but are unwilling or unable to tolerate the risks of equities, that’s where we as advisors have the responsibility to properly educate clients on the various types of investments as well as provide them with realistic expectations when it comes to their investments.

“While I do re-allocate holdings and/or add positions to client accounts based on current market conditions, I am a firm believer in creating properly diversified ‘all-season’ portfolios to combat various market environments; as usually making changes is after the fact and often too late.

“I have seen far too many situations where clients/advisors change their portfolios based on market conditions or forecasts, where the outcome was negative and the change leaves the clients worse off than if they did nothing at all.”


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