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Real diversification means a balanced portfolio that includes bonds, even though they’re out of favour given today’s rock-bottom interest rates

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Tom Bradley isn’t willing to predict where stock markets are headed in the short term, but the chairman and chief investment officer at Vancouver-based Steadyhand Investment Funds Inc. does have a strong opinion on how investors should prepare themselves for what lies ahead.

“It’s a pretty boring answer,” says Mr. Bradley, who co-founded Steadyhand in 2006 after having spent 14 years at Phillips, Hager & North Investment Management Ltd. “Stay diversified – and I mean really diversified.”

By diversification, Mr. Bradley means a balanced portfolio that includes bonds, even though they’re out of favour given today’s rock-bottom interest rates.

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“[Interest] rates have been low for so long, people have exchanged bonds for more aggressive products,” he says. “Fixed-income vehicles are there for defence, but many people are trying to play offence with them now in that part of their portfolio.”

Steadyhand manages more than $900-million in investments for more than 3,000 Canadians and has a reputation for transparency, simplicity and low-fee equity and fixed-income mutual funds.

Mr. Bradley offered his firm’s recipe for investment success, common investing mistakes and the importance of an investment plan in a recent interview, which has been edited and condensed:

How should investors view the outlook?

Markets are always uncertain, though often, what people think about as uncertainties are things that have limited impact. The hottest button with our clients is U.S. politics, but it’s very hard to find a long-term correlation between politics and the stock market.

U.S. election night 2016 was just a few months after the Brexit vote. If you’d asked people what would happen over the next three years, almost nobody would have said three years of surging stock markets.

What’s on your clients’ minds?

They wonder about the next recession. We worry too, but the problem with recessions is predicting them. We think to go away and hide in the face of this uncertainty would be a mistake. We think stocks are the place to be.

So, what should investors’ portfolios look like?

Many Canadians have portfolios they think are diversified, but aren’t. I’ve seen too many people go all in on high-yield [bonds], dividend stocks or preferred shares. These securities are not good for diversification in bad times. Although interest rates are low, you still want government bonds, some high-quality corporate bonds and you might get adventurous with some high-yield bonds.

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If you can own a stock and can live with the fact that it’s going to get hurt [in a recession], that’s fine. But we know when things hit the fan, people aren’t that rational. That’s why bonds are there in your portfolio.

Tom Bradley, co-founder, chairman and chief investment officer at Steadyhand Investment Funds Inc. in Vancouver.

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Where should investors invest, specifically?

It sounds obvious, but they should diversify across economies, currencies and industries. I gave a talk recently to an investment group and told them you’re not diversified if you own Canadian banks, utilities, telecommunication companies and a few real estate investment trusts. A fellow in the audience got really worked up about that. But what you have there is exposure to the Canadian economy, highly linked to interest rates. If interest rates go up, all those stocks will behave very poorly.

What do you see in 2020?

I have no idea. Nobody knows. We project out five years and think that’s useful. Our projection for five years on the fixed-income side are annual yields between 1 and 3 per cent. We think 3 per cent would be pretty heroic. On the stocks side, we’re saying annual returns will range from 5 to 7 per cent, which is below the long-term average.

What’s the most common investing mistake you see?

People get caught up in short-term issues and want to react. So, they forget about the foundation. The foundation is to have a plan that has an asset mix – and to stick to it. If you’re 30 years old, it should probably be all equities. If you’re 55 years old, it should probably be balanced.

What has been the most important lesson you’ve learned?

The value of time and compounding. It’s very tempting to go short term and, as a portfolio manager, there are many pressures to do that. It’s much better to look at a business and ask: “Do I want to own it for a long time?” If the answer is yes, you will probably make money.

Adam Mayers is a contributing editor to the Internet Wealth Builder

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