Clients need guidance on allocation

(December 1, 2004) This season can be one of the most hectic times of year — on top of the holiday planning and prepping the household for winter, it’s also year-end tax planning time. So, while you have your clients’ attention, why not throw portfolio rebalancing at them?

There’s a good chance portfolios are in need of some adjustment too. Since January, the S&P/TSX composite index has risen nearly 10%, which could throw a client’s portfolio out of sync with their desired asset allocation model.

“I see a lot of people coming in with portfolios in the neighborhood of 75% to 90% equities, and sometimes they don’t even realize it,” says Adrian Mastracci, a fee-only investment counsel at KCM Wealth Management in Vancouver. “Most people are not that aggressive, really.”

While everyone is familiar with the simplified strategy of buy low, sell high, Mastracci says many investors forget the second step. They become emotionally attached to their “winners” and are reluctant to sell them.

“Selling high doesn’t mean at the top of the market — I don’t know where the top of the market is,” he explains. “We’re not necessarily at the top of the market right now, but this is a high point. For those people who are not comfortable with their equity exposure, it is a good time to prune.”

Mastracci does not hold to the template that dictates the fixed income portion should equal the client’s age. He says that every plan is unique. In fact, some of his retired clients are more aggressive in their investment strategies than his younger clients.

He says many investors don’t understand what diversification is, let alone rebalancing. He had one new client come in with $400,000 in assets, divided among 20 funds.

“They thought they were diversified, but I said, let’s take the names away and superimpose the funds and see what we’ve got. We had about 70% similarity in holdings across all the equity funds. The person had about 90% in equities and the portfolio really hadn’t changed since the year 2000. They were always high-equity, whether the market was going up or down.”

Rebalancing is not necessarily a once-a-year task, and Mastracci says he rebalances his client’s portfolios throughout the year — typically whenever money is flowing into or out of the account.

“I do want a broad base of equities, but I don’t want to overweight anything in particular,” he says. He includes overweighting investing in the clients’ employer, which is often tempting, as companies offer incentives for employees to own stock. “We try to do away with anything that can possibly hurt your portfolio without you knowing it, with very short or no notice.”

Mastracci emphasizes to clients that it is better to reach the goal they’ve set for themselves than to get greedy and take on more risk than they really can objectively tolerate.

“Everybody wants the highest return possible with no risk, but that doesn’t exist,” he says. “It’s not whether you beat the index or the markets; the question is what do you have to do, to get where you want to be?”

If clients want to take a more aggressive approach, Mastracci suggests they sever a portion of their assets to speculate with, but no more than 10% or 15%. At worst, they could lose that portion, but 85% to 90% of their plan will still be on track. And perhaps the loss will help them be slightly more conservative next time.

“If somebody pays attention to the asset mix that’s appropriate for them, I find they get much less attached to their investments, and they can make a better judgment on that investment than they would if they did not have that asset mix in mind.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com