Trust your gut

With investing, trust your gut

Financial Post June 20, 2009

The client: A high-income couple in their mid-60s living in Vancouver. One spouse is retired. The other planned on retiring in two years but has been given a severance package and forced to retire.

The portfolio: The asset mix is 85% in various equity mutual funds (mostly Canadian) and 15% in GICs. It’s the highly volatile portfolio of a growth investor. In addition, there are company stock options worth $175,000.

The problem: “Being laid off was a life-changing event,” says Biljana Manojlovic, a certified financial planner with RBC Wealth Management in Vancouver. “He came to me worried he wouldn’t have enough money to retire.” When the market tanked, it took a big chunk of their portfolio with it. “With the job loss, they just can’t handle the stress of a volatile portfolio.”

The fix: After analyzing their needs, including lifestyle, investing preferences and risk tolerance, Ms. Manojlovic discovered that the two aren’t growth investors — they are quite conservative. Their portfolio should reflect that attitude, Ms. Manojlovic says. “The asset mix is the key — 95% of your portfolio’s rate of return depends on picking the right asset mix according to who you are. Choosing which stocks or bonds to pick is completely secondary.” Besides, she says, “in economic times like these, people are re-examining their investing strategies. You should trust your gut feeling. Knowing how painful the past 12 to 24 months have been, are you willing to endure that again?” If not, she says, perhaps your portfolio’s risk level should go down a notch or two.

The new portfolio: The clients cashed the pension and put it into a locked-in RRSP worth $380,000. Ms. Manojlovic rolled $35,000 from the severance package into their RRSP, now worth $190,000. The remaining severance and cash from selling off the stock options was $375,000 (after taxes), which was invested in a conservative RBC Managed Portfolio.

Ms. Manojlovic chose to invest in RBC Private pools, which are similar to mutual funds with two key differences: The investment mandate is focused on fewer holdings; and it has higher minimum investment requirements. “This type of portfolio is suitable for those investors with a minimum of $100,000 to invest, who want to save time and get better value for the fees they pay.”

Ms. Manojlovic showed the clients that the layoff had actually put them in a better financial position than if he had continued working for another two years as planned. Now that they have a more comfortable level of risk in their portfolio, they can stop worrying about future cash flow. “They were quite humbled when they realized how much money they actually had,” she says. “It gave them peace of mind.”

———

THE NEW PORTFOLIO

Biljana Manojlovic

Managed Portfoilo, 60% of assets in fixed income and 40% in equities

FIXED INCOME

-RBC Private Canadian Bond pool

-RBC Private Corporate Bond pool

-RBC Private Short-Term Income pool

-RBC Private Global Bond pool

EQUITIES

Canadian equities:

-RBC Private Canadian Dividend pool

U. S. equities:

-RBC Private U. S Equity pool

-RBC Private O’Shaughnessy U. S. Value Equity pool

-RBC Private Global dividend Growth Pool (U. S. holdings)

International equities:

-RBC Private Asian Equity pool

-RBC Private European Equity pool

-RBC Private Global Dividend Growth pool (international holdings)

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