NET WORTH

Buy Low

Economists predict that, with recent market turmoil, British Columbians are likely to put less into their RRSPs this year. Bad idea! But a good idea – especially now – may be what one advisor calls ‘disciplined rebalancing’

By PETER MITHAM; Illustration by KATHY BOAKE

RRSP season should be at its height but many economists expect the final tallies will show that contributions for the season – which ends March 2, 2009 – will be down from previous years.

B.C. residents contributed $4.7 billion to RRSPs last year, or an average of more than $3,000 a person. The national average was $2,780 a person.

RRSPs – Registered Retirement Savings Plans – are a time-honoured way we in Canada have of stashing away a few dollars with the ostensible aim of preparing for retirement but with the more immediate goal of snagging tax deductions. The investment, after all, is sheltered from taxes – meaning taxes aren’t owing on contributions until they’re withdrawn.

But plummeting markets in the months leading up to the current investment season have sapped not just consumer confidence but confidence in the potential of the markets to deliver a return. Just 31 per cent of those eligible made contributions last year, and the percentage could be less this year. Those who do contribute could very well contribute less.

But the behaviour goes against the grain of everything the advisors tell us: If we’re to buy low and sell high, then now is a far better time to invest than last year was. And if we’re to make regular contributions that allow us to ride market swings and worry less about the peaks and valleys of the market, then a) we shouldn’t be fretting about the current environment because we’ve been contributing all along, and b) a lump-sum investment now stands a better chance of appreciation than it did a year ago (hindsight bears out that comment).

We’ve all been burned, however.

And it’s that burning sensation most people can’t escape when it comes to considering new investments, especially in a volatile market like the current one.

But Jonathon Palfrey, a senior vice-president with Leith Wheeler Investment Counsel Ltd. in Vancouver, says a disciplined approach can offer hope.

“Don’t change your investment horizon based on market fluctuations,” says Palfrey, who works primarily with the private-client wing of the firm. “It pays over time to stay invested and to avoid making emotional decisions after markets have declined.

Just like chasing high returning stocks at the top of market is a bad idea, chasing low returning investments near the bottom of a market can be just as damaging.”

Rebuilding a shattered portfolio may take time, but there are ways of addressing losses.

The first is to get advice, starting with a thorough analysis of your portfolio. While it may not pay to ditch good investments that have tanked, any portfolio bears regular examination and potentially rebalancing in order to meet investment objectives.
A number of banks have stepped forward with check-up programs catering to customers anxious about their own financial health, and Palfrey agrees that during difficult times a reassessment is attractive. The key – as in good times – is not to let past performance influence expectations for the future.
“It is easy to look back and expect what happened most recently to occur again in the near future,” Palfrey says. “Avoid that mistake and be forward-looking in the assessment of an investment.”

The second step is to improve diversification. Putting your nest eggs in one basket isn’t wise if you’ve got so many eggs the basket breaks; using two or more baskets is a better way to go about growing and protecting your portfolio.

As your portfolio grows, Palfrey says it makes sense to diversify into other options that provide good opportunities for growth while sheltering you from risk. While diversification strategies have been tested in the current market, which has sent so many sectors sideways, Palfrey emphasizes its ongoing importance.
“A balanced investor with a well-diversified portfolio has generally not been able to avoid weak returns in 2008,” he says. “However, since it is virtually impossible to predict the future returns of markets over the short term with any certainty, a diversified portfolio still makes sense over a full market cycle.”
Again, that can mean rejigging a portfolio with a view to finding investment opportunities that meet both the emotional and financial needs of the investor. A portfolio whose value was weighted 70 per cent to stocks and 30 per cent to bonds may require what Palfrey terms “disciplined rebalancing” through the sale of high-priced bonds and the purchase of stocks that are valued below the long-term value they offer (and with the potential to appreciate back to regular levels).

The success of discipline and paying a portfolio some focused attention is borne out by past market cycles. Larry Jacobson, a principal with Macdonald, Shymko & Co. Ltd. in Vancouver, advises his clients never to react to headlines. Writing in a recent letter to clients, he pointed out that investors who sought to capitalize on market fluctuations rather than pursuing a disciplined strategy saw significantly lower returns than those who had invested a single sum and let it be. Jacobson, citing figures from investment research firm Dalbar, noted that the average mutual fund investor who sought to time the market between 1987 and 2005 saw a 3.5 per cent annual compounded return. An investor who stayed put garnered a 10.8 per cent annual compounded return.

Similarly, in the 21 years following October 19, 1987, when the Dow Jones Industrial Average dropped 508 points to close at 1,739, a portfolio of large-cap U.S. equities rose approximately nine per cent a year.

“The markets are extraordinarily resilient,” he said during a recent interview. “Yeah, we’ve had some significant swings and volatility. They will come back. Now, will they come back to the 12,000 that we left the Dow at a few months ago? It probably will. I don’t know when. But it probably will. It’s a question of time.” mv