It's not a question of whether to invest - but how

"Tom, is now a good time to invest?"

When I get that question at a party or reception, I freeze up. It's weird because I'm reasonably competent at social banter, especially when I have a cocktail in my hand, and I certainly have views on these kind of things. But I find myself quickly shifting to another topic. "How about those Canucks?"

The reason I hesitate is because the question runs against how I think about investing, so answering it seems inappropriate in a social setting, to say nothing of it being a conversation-killer.

The question investors should be asking is not whether it's time to invest, but rather, are there any reasons not to? The starting point for any decision should be a fully invested position as represented by their long-term asset mix.

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Now I know this is pretty basic stuff, but unfortunately, many people are not wired this way. They are savers at heart, not investors. Their default position is the safety of a bank account or mattress, both of which put them at a disadvantage when it comes to achieving their financial goals.

For an investor, a long-term or strategic asset mix is the key element of their strategy and the one that has the most impact on future returns. It's an educated guess at what the best combination of cash, bonds, stocks and other investments (including real estate) is for their situation. It takes into account their objectives, time horizon and tolerance for short-term volatility.

Near-term predictions about which asset types are going to provide the best returns are at best unreliable. But when making projections over longer time frames, the crystal ball gets less cloudy. We know, for instance, that stocks will beat bonds, and bonds will beat cash (SBC). And the range of possible outcomes gets narrower the further we look out.

For example, bond returns are difficult to call in the next year or two due to swings in yields and credit spreads. But looking out 10 years or more, we have a reliable indicator of what returns will be, namely current interest rates (3 to 4 per cent). For stocks, the range is wider, but it's more like 5 to 9 per cent as opposed to plus- or minus-20 per cent.

Investors have the math working for them.

I give investors a further advantage over savers because they can base their decisions on more reliable data, including long-term projections.

Investors first need to set an asset mix. For those with a long time horizon, this is not rocket science (see SBC above). And then they need to determine how they want to manage the portfolio around that mix.

Some investors try to time the market and actively shift the mix. Others, like me, could best be described as tilters, leaners or shaders. Our allocations are adjusted to reflect our views on valuation and market sentiment, but we only move away from our baseline when there's a compelling reason to do so, and always within a set range.

For investors who don't have the wherewithal or inclination to outguess their long-term targets, it's best to set the portfolio mix and keep it there.

What does it mean to make all your investment decisions in the context of a strategic asset mix?

It means you agree with the long-range projections (SBC) and accept the fact that it's impossible to know when to get in and out of the market.

It means that you'll always be diversified, which in turn means that you're not trying to get everything right all the time. This will make you boring at parties (take it from me) because you won't be the one bragging about how you made a killing on oil, high-yield bonds or emerging markets. But you'll be comfortable knowing that you too benefited from those trends, just not in a 'go big or go home' way.

It also means there won't be all that much to do. New 'flavour of the month' product offerings won't hold much appeal. And the mind-numbing decision of what to do at the RRSP deadline will be an easy one - allocate your contribution in line with your long-term mix.

These days I'm doing three things in my portfolio and emphasizing the same with Steadyhand clients.

First, I'm being careful not to get carried away with the great returns of the last year. Indeed, I've moved my equity allocation towards the cautious side of the range. That has required some rebalancing towards bonds and cash.

My reasons for caution have been outlined in previous columns, but suffice to say it's based on valuations (reasonable), market sentiment (are investors living dangerously again?) and the economy's inevitable transition from The Great Debt Transfer to The Great Debt Reckoning.

Second, as part of the rebalancing, I've used the strong loonie to opportunistically increase my weighting in foreign stocks. They have lagged behind my domestic holdings, mostly because of currency.

Finally, I'm paying special attention to cash flow management. It's easy to get lazy about setting money aside, but now is not a time to be lazy.

Now to get back where we started … Can you believe Steve Nash is having another MVP-like season?