Focus on risk management and diversification

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After a turbulent start to the year on North American stock markets, it is little wonder that investors are being advised to avoid excessive risk and focus instead on preserving their capital.

Bruce Cooper, chief investment officer, TD Asset Management, and senior vice-president, TD Bank Group, believes a diverse portfolio – that includes high quality assets, as well as domestic and global equities – can be a good strategy for 2016, which he expects to be another year of weak growth, low investment returns and heightened volatility in global financial markets.

He sees no quick end to some of the forces that have sent the price of oil crashing below $30 (U.S.) a barrel, putting severe pressure on the Canadian dollar and prompting the Bank of Canada to drop its GDP annual growth forecast to 1.4 per cent from 2 per cent in October 2015.

"This is a time to focus on risk management,'' he says. "It is not really about how can I make tons of money. It's about how can I protect myself to ensure that I preserve capital and defend myself so that when opportunities present themselves, I am in good shape to take advantage of those opportunities."

Investors can arm themselves by holding a good variety of high-quality assets, including domestic and global equities that have the ability to increase their earnings and dividends in a low-growth environment.

A typical portfolio should also include some cash to keep some capital safe, as well as investment-grade corporate bonds to provide some income and diversification.

"We are cautious about both emerging markets and high yield, and prefer developed markets and investment- grade bonds," he says.

In an interview, Mr. Cooper said he is not pessimistic enough to anticipate a stock market crash. "As you know from our outlook, we characterize our views as cautious. We expect modest or muted or no returns, but not a crash."

But he says investors should remember that major economies are locked in a period of persistent low growth due to high debt levels and unfavourable demographics in Canada, United States, Europe and China, where working populations are either growing very slowly or even shrinking.

"That is something that is not going to change meaningfully overnight. It is yet another reason for investors to err on the side of caution."

But no matter what the investment climate looks like in the short term, Mr. Cooper believes people are always better off working with an adviser to figure out their long-term goals, develop a plan and then stick to that plan.

"For most people, assuming you plan to leave the money invested for a long enough time period, it would make sense to have some equities (albeit fewer equities today than you might have had a year or so ago)," he said.

He believes 50 per cent of equities should be located outside of Canada. That's because the Canadian market is resource-oriented and tends to lack companies in more stable sectors, such as pharmaceuticals, consumer staples and technology. "As Canadians, it is useful to have exposure to those kinds of businesses. To get that, you really need to go outside Canada," Mr. Cooper says.

On the equity side, U.S. exposure offers a window on the U.S. dollar, which tends to perform better when times are tough. It also provides currency diversification. "We saw how important that was last year when the Canadian dollar declined," Mr. Cooper says.

Given low commodity prices and weak growth in Canada, it is likely that the Canadian dollar will remain at current low levels for some time, according to TD Bank.

This content was produced by Randall Anthony Communications, in partnership with The Globe and Mail's advertising department. The Globe's editorial department was not involved in its creation.