Portfolio strategies for the dog days of summer

Guest columnist Bruce Loeppky kicks back and muses about market direction as the summer doldrums settle in.

Portfolio strategy for a quiet market

By Bruce Loeppky

Stock markets have risen steadily over the past year, with no major corrections along the way. The end of July saw a broad market decline, but less than the 10% drop that would qualify as a “correction.” In general, markets have been unusually placid. The question is, have they been too quiet? The answer depends on how you’ve allocated assets in your current portfolio.

If you are holding, say, over 70% equities in your portfolio, and especially if you are over 50 years old, you should look at tapering down the equity allocation, crystallize some profits, and increase weighting in the balanced or fixed-income portion.

Those investors with no defined benefit (DB) pension plan should be even more careful, because your fallback plan is to retire later or work longer if your portfolio isn’t sufficient to meet your income needs come your hoped-for retirement date. That decision isn’t always in our hands, because employers like to downsize and replace older, more expensive workers with younger (cheaper) faces. This is very important in regard to safeguarding assets built up over 20 years or more.

Late-cycle investing risks

People thinking about investing larger lump sums have to be very careful when the markets have had a few good years, because risk may increase the as a bull market ages.

When the markets have gone through a 40% correction, most (if not all) of the risk has been removed, leaving potential investors in a very favourable position. If that’s the case, why don’t we see money inflows rise sharply after these corrections? The reason is that after a correction, retail investors are still afraid of a further drop. When people are fearful, they put their head in their shell and run to “safe” but low-yielding assets like money market funds or GICs.

Rethinking risk

This doesn’t mean you should give up on equities as part of your investment portfolio in good times. It just means you should not be overly aggressive based on strong past performance, thinking it will continue. It might…and it might not.

Stock markets will always rise and fall, but they advance more often than they retreat. We know this from over a century of market history. What we don’t know is when they will rise or fall, to what extent, or for how long. These are, of course, all huge pieces of the puzzle, which is why, for most average investors, a balanced portfolio works best, with assets allocated in line with your risk tolerance and age. For example, as I said earlier, if you’re over 50 years old, at this stage of the market cycle, you probably wouldn’t want a portfolio weighted 70% to equities and 30% to fixed-income and cash.

What I’m saying is to tread carefully as you navigate the future with so many unknown variables in play. Don’t be too aggressive, because the timing just isn’t right any longer. It’s better to give up a modest 5% to 10% in performance than to suffer a steep 35% loss a couple of months after you’ve committed heavily to equities at what may turn out to be the very top of the bull market.

Courtesy Fundata Canada Inc. © 2014. Bruce Loeppky is a financial advisor based in Surrey, B.C. This article is not intended as personalized advice.