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Building the Ideal Portfolio


Building the ideal portfolio requires a blueprint

Your wealth is the culmination of your hard work, discipline, and astute management. Wealth equals freedom, yet growing and preserving your wealth can often pose significant challenges. Having true wealth not only presents opportunities, it also presents a multitude of complex challenges. With today’s uncertain economic outlook, volatile markets and low yielding fixed income investments, how do you structure a portfolio that not only grows your wealth, but also protects your wealth at the same time? The secret is to create a long term investment plan that is specific to your investment needs and reflects current market conditions and opportunities. All too often however, investors well intended plans are derailed by volatile and uncertain markets, causing them to panic and make adjustments to their portfolio in reaction to short term market swings and negative news forecasts. The result can have catastrophic consequences to the long term growth prospects of their portfolio and negatively impacting their wealth and financial security.

The ideal portfolio is a constantly evolving portfolio that is custom designed and constructed around your own specific needs, and actively managed tax efficiently to reflect the current market conditions and opportunities. The ingredients of a successful portfolio should include these components:

Investment plan: – You would not go on a long trip without first planning your trip? Creating an investment plan to grow and preserve your wealth is a life long journey and cannot be done haphazardly. The investment plan is commonly known as an Investment Policy Statement or (IPS). It is a written roadmap for your investments, which outlines specifically how your investments will be managed to meet your investment goals. Your IPS should define your time horizon, tolerance towards investment loss; consist of the right mix of investments, what investments are acceptable or unacceptable for you, and what to do in reaction to different market events before they happen and while they are happening. A well-defined IPS will result in a properly constructed portfolio that will take out the emotional aspect of investing.  Instead of you reacting to current market conditions based on your emotions, you will be proactive and be able react to other people’s emotions.  Just like market timing does not work, reacting to market volatility by panicking and going to cash will hurt your long term results.

Strategic asset allocation: – Investing is a trade-off between risk and return. Some lower risk investments may guarantee your money, but often provide lower returns. On the other hand, many investments that offer higher returns can come with a greater level of risk. The trade-off is finding the right balance for your portfolio. Strategic asset allocation is the philosophy that involves setting up the asset mix that provides you with the maximum rate of return given your personal risk level. This is a longer-term and more disciplined process that relies on predictable market data that should result in predictable above average returns over time, with reduced risk. It has been proven time and time again that the asset allocation decision is the most important one you can make when structuring your portfolio.

Diversification: – No single investment is right for every point in time. Investments and geographic markets are either in favour or out of favour, overpriced or underpriced, that is why a properly constructed portfolio is needed to help smooth out the market’s ups and downs. The key is diversification. By combining different investment styles, asset classes, exposure to various geographic regions and constantly rebalancing your portfolio to your original target mix, your portfolio can be positioned to capture growth opportunities while not compromising safety of your capital.

World-class investment managers: – Using professional investment management to make the individual stock and bond decisions on your behalf is a much more customized approach to managing your money. You want your money to be managed by professional money managers who are among the best in their field. Generally investment management teams have access to independent world world-class managers not available to retail mutual fund investors because they focus on institutional clients such as pension funds and high net worth client portfolios. These managers tend to have more control of how their portfolios are managed and tend to be less volatile and more tax efficient because they do not have to deal with rapid influx and outflows of money from uninformed and undisciplined retail investors. Their investment decisions are based on a more stable and predictable flow of money into and out of their portfolios.

Strict investment mandate: – Investment management teams generally evaluate investment managers against strict criteria to ensure that they adhere to their investment mandate that they were hired for.  These managers must invest according to the specific investment approach dictated by the investment management team and for which they were hired and deliver consistent performance compared to their benchmark. Investment managers are usually selected based on a proven investment philosophy and process, a strong team, strong track record, how well each of the managers hired complement each other and how they add value to the overall investment portfolio.

Automatic rebalancing: – Over time, as different asset classes perform at different rates; your portfolio will deviate from your original asset allocation. This means that your portfolio may no longer be performing according to your investment plan and you may be exposed to a greater level of risk than you are comfortable with. Having a disciplined strategy of rebalancing your portfolio back to your target mix as a result of market volatility creates opportunities to do strategic market timing by taking some profits from investments that have outperformed in your portfolio and reinvesting those profits into less expensive investments that have under-performed in your portfolio.  Over time this strategy has proven to enhance overall portfolio returns. By choosing the right combination of risk and return, you have the potential to maximize your growth, while at the same time staying within your comfort zone.

Currency hedging: – While not a common strategy yet some portfolio management services already employ this strategy. Dynamic currency hedging strategy is used to minimize currency risk in your portfolio;

Tax efficiency: – The more you have the more you pay: it’s a fact of life or is it?  The tax effectiveness of your investment portfolio can be addressed through tax optimization and the use of tax-advantaged investment structures. As you know, it’s not how much you make that counts, it’s what you get to keep that matters! Heavily taxed investments should be sheltered in registered plans or held in accounts of family members who have a lower tax rate.  Investments offering favourable tax treatment or tax deferral opportunities should be placed in accounts of a higher income earner.

Tax deferral: – For investments held outside of a registered plan, tax efficiency is a critical issue. Since your non-registered assets are not sheltered from taxes, rebalancing transactions and investment distributions are taxed, adding up to a heavy tax burden.  This can be solved by structuring your non registered portion of your portfolio in a tax-advantage corporate class portfolio structure offered by some managed portfolio programs. Incorporating the tax-advantaged structure into your portfolio gives you the flexibility to make investment decisions without creating tax liabilities.

With an investment plan in place, you are more likely to stick to your long term investment strategy. You will have the courage to stay the course as you will know what to expect, and with professional management looking after your investments you will be in a position to take advantage of the markets uncertainty and volatility.

– By Adrian C. Spitters, FCSI®, CFP®, FMA

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About the Author:

Adrian Spitters is an avid writer and blogger who recognizes the need to publish on issues relating to the retiring business owner and farmer, by offering information and insight to help them transition into retirement and create sustainable multi-generational family wealth.

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