Finance Diversify There’s a school of investment thought that pooh-poohs diversification. Which believes that spreading your eggs among different financial baskets simply dilutes performance. Which thinks that the best way to become wealthy is to concentrate the bulk of your portfolio in businesses that you know very well (preferably one which you built yourself). Here’s the thing: there’s a lot of evidence which suggests that such an approach works − that is, if your goal is to become fabulously rich. But let’s be perfectly honest with ourselves: for most snowbirds, that really isn’t the goal. Oh sure − we’d all like to build our wealth. But really, for most of us, the goal is to secure what we’ve worked long and hard to build, and ensure a high quality of life for the entirety of our golden years. We’re not really looking formore wealth −we’re looking for less risk. And if that means passing up on the opportunity tomake gajillions on a single great investment − well, most of us are willing to make that trade-off. Which is why most experienced investors spread their money into different markets, different assets and different management styles. They’ll hold some North American stocks. But they’ll also take a look at some European and Asian businesses, which seem much more reasonably valued right now. They’ll hold some bonds, some real estate and maybe even some gold or other commodities − all of which have historically “zigged” when the stock markets “zagged.” And they’ll also place some money with some professional money managers who pursue a variety of different strategies (value investing, growth investing and momentum investing are common examples) that perform differently as the economic and financial cycle ebbs and flows. Such an approach smooths out rough patches and prevents them from blowing up their portfolios on one bad mistake. Keep it simple There’s an acronym that most of you from the business world will recognize: KISS, or “Keep It Simple, Stupid.” And while we would never advocate calling yourself bad names, KISS is a very good mantra for volatile times − a reminder that when the stock market gets volatile, investing in simple ideas that you can easily understand, easily execute and easily get out of (if the need arises) is usually a pretty good strategy. What we’re talking about here are well-managed, resilient businesses that don’t necessarily require an MBA or a PhD in computer science or molecular biology to understand. The kind of large, highly liquid, blue-chip dividend-payers that offer a relatively safe place to grow your capital over time. Think utilities, Canadian banks and long-established businesses in industries that have an easily defensible “moat” around them − the Canadian railways are a great example here, as are many drug manufacturers and companies that make the “must have” consumer products which we continue to buy, despite what’s going on in the stock market. Will such investments make you rich? Probably not − as long-standing, well-established businesses, they’re just not cut out for the kind of explosive growth that can lead to overnight market millions. And, just to be absolutely clear: even with such “easy win” stocks, you’ll still have to do your homework, be mindful of valuations and proceed cautiously, rather than going “all in” all at once. On the other hand, you probably won’t have to try to dissect an arcane research report, take a guess as to which of several competing technologies will eventually win out (remember VHS versus Betamax?) or lose sleep over whether those drilling reports or FDA data will come back positive. If you must speculate in more complex investment ideas, then make sure to make such speculations a small portion of your overall investment pie − say, nomore than 5% of your total value, or whatever amount you could afford to lose completely, whichever is smaller. Do your due diligence, seek out second (or third) opinions and move with extreme caution − it’s often the “high-risk, high-reward” ideas that get punished first in any downturn. Hire people smarter than you and me To you and me, volatility can be deeply unsettling. The constantly changing economic background can be difficult to digest and analyze. And the emotions brought on by seeing our portfolios go up and down dramatically in value on a monthly, weekly or even daily basis can make it really hard to make good financial decisions. So why not outsource the problem? By hiring a professional to manage some or all of your portfolio, you can take advantage of their superior knowledge and expertise, and offload a lot of the stress and time-consuming homework that comes withmaking your own investment decisions. There are a couple of ways to do this. If you’re not already working with a professional financial planner or wealth advisor, now is an excellent time to look for one. For those “set-it-and-forget-it”− type of investors who would rather be crossing items off life’s to-do list than closely following market news, watching stock movements and endlessly Portfolio strategies Practical tips and hints on how to protect your investment portfolio from falling victim to volatility. 34 | www.snowbirds.org
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