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(Arpad Benedek)
(Arpad Benedek)

Portfolio Strategy

Buy and hold ... but be ready to fine-tune Add to ...

Buy and hold, but tweak and modify.

That's the investing approach taken by a pair of money managers who have just updated some simple portfolios they created a little over a year ago using exchange-traded funds. The broad details are the same in each portfolio, but adjustments have been made to reflect changing financial market conditions and new products in the ETF world.

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Buy and hold investing is a sound approach for most investors because of the risks of over-handling a portfolio. Among them: Buying and selling at the wrong time, and wasting money on fees and commissions (read my argument in favour of buy and hold online here).

But there's an evolved form of buy and hold that you'll see in the modifications made by our two managers to the conservative, middle-of-the-road and aggressive portfolios they created last year. These tweaks aren't necessarily right for your own portfolio, but they do give you a sense of the way the pros fine-tune their approach.



Ioulia Tretiakova, vice-president at PUR Investing Inc. in Toronto

Several of the changes made in Ms. Tretiakova's portfolios are to prepare for rising interest rates.

Instead of using a well diversified bond ETF with a mix of short- and longer term bonds and government and corporate bonds, she has gone with short-term corporate bonds for each portfolio. They'll hold up comparatively well when rates rise (though they could still lose value), and they help maximize the thin yields available from short-term bonds.

Ms. Tretiakova sees stocks as offering less long-term volatility than they did last year, so she's ramping up risk levels in each of the portfolios. For example, iShares Russell 2000 Index Fund (CAD-Hedged) an ETF tracking the small companies of the Russell 2000 index, has been substituted for one tracking the big companies of the S&P 500.

In terms of new products, Ms. Tretiakova has added an ETF that covers the entire global stock market in a single fund - the iShares MSCI World Index Fund Other new additions include the ultra low cost Horizons S&P/TSX 60 ETF, which she describes as "an unbeatable deal for Canadian equity holders at a 0.07 per cent MER."

One final addition is the BMO Covered Call Canadian Banks ETF which uses an option strategy to emphasize high levels of income over capital gains. Ms. Tretiakova has included this ETF in the safety-first portfolio because she believes it will dampen risk and generate tax-efficient income in non-registered accounts.

Click here to see Ioulia Tretiakova's portfolio



Adrian Mastracci, portfolio manager at KCM Wealth Management Inc. in Vancouver

Mr. Mastracci continues to use guaranteed investment certificates for fixed income, but he has also mixed in some exposure to short-term provincial bonds. He regards these holdings as a comparatively safe parking spot for money until rates have risen and investors are able to get higher yields from bonds and GICs.

Once yields have risen to the 4 to 5 per cent range, he will start switching into longer term bond ETFs. Notice how Mr. Mastracci is using a variety of ETFs to cover off exposure to the Canadian stock market. His reasoning is that each of these ETFs tracks an index with different characteristics. "This gives you some diversification in the portfolio," he said. "If one does better than the other, so be it."

Like Ms. Tretiakova, Mr. Mastracci has found the new BMO covered call ETF to his liking. "I'm looking to add a little income without taking on a lot of risk," he said. "I see the risk level as being low with this kind of strategy."

While Ms. Tretiakova is using U.S.-listed ETFs for U.S. and international exposure, Mr. Mastracci goes with TSX-listed funds that use currency hedging to screen out the impact of a fluctuating Canadian dollar. Hedging adds to the cost of these ETFs, and it's an imprecise tool that can lead to discrepancies between actual index returns and your returns. But Mr. Mastracci likes the way hedging reduces currency risk, which would be an issue if the Canadian dollar keeps rising. One prediction this week called for the dollar to rise to $1.09 (U.S.) by late 2012.

Click here to see Adrian Mastracci's portfolio

Follow on Twitter: @rcarrick

 
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