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How I Do It

A nest egg of checks and balances Add to ...

Who: Adrian Mastracci, president of KCM Wealth Management Inc. in Vancouver

The Strategy: To take neglected portfolios of individual investors and shore up the foundations, revisit goals and ask some key questions: What is your nest egg supposed to do? What income is it to provide you with? When will you start drawing on it?

"Most portfolios are left on their own with few checks and balances over the years," Mr. Mastracci said in an interview.

As a discretionary portfolio manager, Mr. Mastracci designs and manages clients' portfolios, makes all the trades, rebalances the holdings, monitors performance and reports back to clients.

Once the basic questions have been answered, he calculates how much money clients will need to attain their goals. Then he calculates what returns clients will need to meet their income needs.

"We do that before we invest anything," he says. "So the client knows he needs to earn 4 l/2 per cent a year for the next 10 years. We don't want to take any more risk than we have to."

Next, he picks an asset mix - stocks, bonds, cash and real estate - designed to achieve the client's goals.

Broad diversification is key to KCM's strategy because it is critical to avoiding big losses. No single stock or bond comprises more than 4 per cent to 5 per cent of a portfolio.

A client may come in with a large holding of company stock through a share purchase plan, a company pension and a salary paid by the company.

"That's a lot of eggs in one basket."

KCM's client portfolio strategy usually includes a healthy dollop of fixed income, especially now, when stock markets look shaky.

"My most racy client probably has 50 per cent in equities right now."

The firm sets thresholds in advance at which money-losing stocks are to be sold, and corresponding points on the upside.

"Nobody ever went broke taking a profit," he notes.

When It Works Best: The strategy works best for investors who are patient and have a longer time horizon - at least five years, although seven to 10 years is preferable, he says.

"Even if you are 65, you can still have a long time horizon."

What Could Go Wrong? "We had 2008," when financial markets collapsed. "We could have another one. That's the worst situation portfolios can go through. We're relatively conservative, investing defensively, but we have to take some risk."

In 2008, Mr. Mastracci said he made "a concerted effort to go to cash before the big waterfall."

How Is He Doing? Every client has an individually managed portfolio, so there is no broad measure of the manager's performance.

"Some have 100-per-cent fixed income, they're going to get 2 or 3 per cent. Others who have 50 per cent equities, over the long term, a balanced portfolio will give you 6 per cent to 8 per cent."

Rebalancing is critical to achieving these returns, he notes. "If you don't rebalance, all bets are off."

Market Outlook: For the Toronto market, "we think it will be a roller coaster between 9,000 and 13,000" for the remainder of the year, he says. Similarly, he sees the Dow Jones industrial average fluctuating between 8,000 and 12,000. "We're roughly in the middle now."

"This market is one where all you need is to have a few good data points and you're roaring again. One day it's going off a cliff, the next day it's roaring."

"We try to be realistic, preparing for both the plus side and the downside. If clients can't stand it, they can't be in equities."

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