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investing strategy

More than a year after the most dramatic market meltdown in modern history many Canadians at or near retirement age are still trying to pick up the pieces.

In the nine-month period from June of 2008 to March of 2009, the typical Canadian stock portfolio lost more than half its value. Investors who panicked and sold probably missed out on this year's rebound, but even those who stayed the course likely haven't recouped half of their losses.

Investors need to come to grips with the likelihood that those losses won't be gains any time soon, says Richard Wylie, vice-president investment strategy for Assante Wealth Management. "It is most unfortunate for the people that are closest to retirement," he says.

From his Toronto office Mr. Wylie oversees more than 800 financial advisers across the country with about $20-billion in assets. He's noticing a trend where investors are hoping to make up for lost ground by attempting to time the markets.

"I think the people that are going to try to shoot the lights out and go for the home run are going to be facing higher risks than they probably should," he says.


Even investors who missed this year's gains are taking a risk by staying in cash waiting for a big market correction to reinvest, he adds. "That's always a risky proposition because no one knows when one is coming."

His advice is to forget the past and return to the basics - a fixed income/equity mix that generates steady returns, a diversification strategy that limits risk, and plenty of patience. "Markets do go up more than they go down and over time they will recover. The markets will get back to the highs that we've seen. It will take time."

Keith Richards, a portfolio manager with Barrie, Ont.-based ValueTrend Wealth Management says many people are falling into a classic herd mentality. "Right now people are scrambling to try to get their portfolio back and what they're doing is speculating once again."

As a technical analyst he sees a pattern in the current market environment that harkens back to the technology bubble of the late 1990s and the real estate bubble of the early 2000s. Now, he sees a bubble forming in gold and gold-related stocks.

It prompted him to write a booked called SmartBounce: 3 Action Steps to Portfolio Recovery. In it he suggests breaking away from the herd by selling investments that have performed well, such as gold, and buying into investments at the low point of their cycles.

"There are different sectors that move at different times according to market conditions and seasonal strategies" he says. "Why not go out of the area where you've made money and take some of the risk off your portfolio, and move into an area that historically and statistically has a better risk reward/profile?"

For example, his technical analysis concludes oil and gold-related investments tend to peak in late October and technology and consumer discretionary related investments tend to rise in winter.

However, he says before any trades are made, investors need to have the right balance in their portfolios. In addition to diversification he says the percentage of fixed income should be near the portfolio holder's age. In other words, if you are 50 years old about half of your portfolio should be invested in bonds and other reliable income-generating securities.

The best way to strike that balance is by talking to a qualified financial adviser, he says. "You need to be patient and disciplined. The people who lost money in this market didn't have patience or discipline to begin with."

Two investors who are playing the catch-up game quite well are Youssef Zohny and Andrew Parkinson. Their Van Arbor Canadian Advantage fund has nearly doubled since the start of 2009 after holding losses during the meltdown to just under 40 per cent.

Mr. Zohny says it wasn't cowboy investing that generated the big gains - but rather risk diversification. "We actually play a range of risks," he says. He attributes the success of the fund to a strategy that intentionally avoids a portfolio that resembles its benchmark index - the TSX Composite.

While the TSX Composite is made up of roughly one-third resource stocks and one-third financial stocks, the Canadian Advantage fund holds only a 10-per-cent stake in energy and even fewer financials. That's because the fund took profits earlier this year when energy and financials rallied.

"We adjust our risk on each of the sectors. It's a very active style that sometimes can be very conservative but at other times can be very aggressive," Mr. Zohny says.

Unfortunately for investors trying to play catch-up, he says the opportunity has passed - for now. "I think if you take the short-term view of trying to catch up in the next three to six months, now is not the appropriate time," Mr. Zohny says.

He describes the current market climate as "a time of capital preservation." During that time the fund is going back to its principles of finding growth stocks at low prices.

Two examples in the Canadian Advantage portfolio are Shaw Communications Inc. and Rogers Communications Inc. Both are considered growth stocks because they are major players in the burgeoning telecom sector.

Individually, Rogers' shares have increased 125 per cent in value and the dividend has doubled in the past five years. Over the same period shares in Shaw have doubled and the dividend has increased 57 per cent.

On the value side Rogers stock is trading at 13.6 times estimated earnings and Shaw is trading at 14 times estimated earnings. In comparison the TSX Composite on average is trading at 21.6 times earnings - a much higher price in relation to earnings.

"The growth companies have become value companies. It's been intertwined over the last year or so," Mr. Zohny says.

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