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Portfolio Strategy

Portfolio stabilizers show their mettle during latest turmoil Add to ...

Worried investors have inundated Robert Goldin in the past two weeks.

"With the market in turmoil, I've been getting 30 to 40 calls a day from investors worried about losing money again," the Thornhill, Ont.-based investment dispute consultant said Friday. "In fact, two days ago it got so bad I had to take the phone off the hook."

The callers are people who lost money in 2008, recovered somewhat in 2009 and are once again looking at losses. Mr. Goldin's job is helping people who have lost money because of bad investment advice, but some of the callers are just plain afraid.

Buck up, investors. While stocks have fallen hard lately, the current stock market correction has been nothing like the blow-up of 2008-09.

In fact, the basic rules of diversification have been working fine in May, unlike the last time the markets plunged. Back then, all that saved you were government bonds and treasury bills. Everything else tanked, including preferred shares, corporate bonds and the sort of stable blue-chip dividend stocks that are often described as being defensive.

If you're well diversified, you probably own some of these kinds of securities and thus you may have less to worry about than you think right now.


That's a message that Jim Steel, president and portfolio manager at Polaris Financial in Ottawa, has been telling anxious clients lately.

"We did some reviews at the beginning of the year, before we had these huge dips in the market, and people were pretty happy," Mr. Steel said. "But I'm getting a lot of calls now where people are saying, 'Here we go again - is this going to continue?'"

To start with, Mr. Steel has spread client portfolios across stock markets in Canada, the United States and internationally. In 2008-09, this meant nothing because all markets cratered similarly. So far in May, it's a much different story.

For the month through Thursday, the MSCI Europe Australasia Far East Index was down 12.9 per cent, which makes sense because the fear in financial markets is radiating out from Europe right now. The S&P 500 stock index, a benchmark for U.S. stocks, was off 11.2 per cent over that period, while Canada's S&P/TSX composite index declined 5.8 per cent (S&P 500 and EAFE returns are in U.S. dollars).

Canada's comparatively strong performance stems from the fact that our federal government debt is manageable and our economy is resilient thanks to its focus on high-demand commodities.

But the commodity tilt in Canada is also a potential risk factor that suggests you don't want to completely ignore global investing. Oil and metal prices have already fallen in the past few weeks and significant further declines could hurt the Canadian stock market more than some others.

Mr. Steel has diversified the stock market exposure in his client portfolios with fixed income, which in his case means guaranteed investment certificates and preferred shares.

GICs are one of the best diversifiers going if you want something in your portfolio to provide balance when stock markets are weak. GICs are guaranteed through deposit insurance, and their value doesn't fluctuate in your portfolio like a bond or bond fund will. The tradeoff is that you can't sell a GIC at will (unless it has a cashable feature).

It appears that lots of investors are using GIC these days to some extent. The research and analysis firm Investor Economics says there was a record $1.1-trillion sitting in safe investments as of the end of last year, and GICs accounted for 42 per cent of the total.

Mr. Steel uses the highest-yielding GICs he can find, while ensuring that clients are within deposit insurance limits. For banks that are members of Canada Deposit Insurance Corp., that's $100,000. Note that Ally, a CDIC member through parent ResMor Trust, has been paying 4 per cent for a five-year GIC and rates of 3.5 to 3.75 have been widely available elsewhere (check Cannex.com).

Bonds have played their usual role as portfolio stabilizers this month, but with a difference over 2008-09. Back then, you had to own government bonds. Even blue-chip corporate bonds were thrashed.

Now, the broad bond market is working for investors. The DEX universe federal government bond index was up 1.7 per cent for the month through Thursday, while the DEX all corporate bond index rose 0.7 per cent. Blend them together and you get the DEX universe bond index, up 1.3 per cent for the month to date.

Preferred shares are a particularly good example of how diversification is working today - unlike the last time the markets plunged. Preferreds are a way for conservative investors to generate tax-advantaged dividend income without taking on the risk of the common shares that dominate the stock market. A troubled company will cut or suspend common share dividends before turning to its preferred shares.

In the financial crisis, investors weren't taking anything for granted and they abandoned preferred shares in a way that caused severe price declines. In May, however, preferreds hung tough as a group.

The S&P/TSX preferred share index is off just 1.7 per cent for May and in the first four days of the week it lost just 0.3 per cent. The S&P/TSX composite fell 5 per cent in the past four days.

Mr. Steel said he's keeping his clients for now in rate-reset preferred shares, where the issuer (generally a bank) has the option every five years to either redeem the shares or adjust the rate higher to keep up with any interest rate hikes.

Rate-reset preferreds are defensive in two ways - they offer stable income yielding a little above 4 per cent right now, and they should hold up better than perpetual preferreds when interest rate rise. Perpetuals are open-ended, with no fixed redemption date and no mechanism for adjusting dividends higher if rates rise.

Some dividend-paying blue chip common shares have also held up better so far in May. The most striking examples are in the telecom services sector, which was flat over the month to date. Two names to note: Rogers Communications, up almost 3 per cent so far in May, and BCE, up almost 2 per cent. Rogers offers a dividend yield of 3.6 per cent, while BCE is at 5.6 per cent.

Mr. Goldin, the investment dispute consultant, said some people are suffering more than necessary in the stock market downturn because their portfolios are riskier than they should be. He suggests people ask their advisers for a copy of the Know Your Client form that sets out their risk tolerance and investment goals. The next step is to compare what's in the form to their actual portfolio and see if too much risk has been taken on.

Your best offset to stock market risk: diversification. Unlike in 2008-09, it's now working as advertised.

Follow me on Facebook. I'm at Rob Carrick - Personal Finance

How Diversification Has Helped You in May

Imagine you're an investor with a portfolio that is 60-per-cent weighted to stocks and 40 per cent in bonds. Plunging stock markets this month will have hurt you, but maybe not as much as you might think. Let's take a look using some of the major stock and bond market benchmark indexes.

% Weighting

% Return


In Your Portfolio

in May

Canadian stocks (S&P/TSX composite)



U.S. stocks (S&P 500)



International stocks (MSCI EAFE)



Fixed Income

Federal government bonds (DEX federal bond index)



Corporate bonds (DEX all corporate bond index)



Total portfolio




~returns are to May 20

~returns for the S&P 500 and EAFE indexes are in U.S. dollar terms

Source: Globeinestor.com, PC Bond Analytics

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