"Investing Themes" for 2010

I was recently asked by a leading Canadian finance journalist what "themes or ideas" I was working on for the new year.

My response:

Let me preface this by stating my somewhat contrarian approach to the idea of "themes" which, experience has taught me, are usually being utilized to generate "turnover". The ongoing dilemma in our "industry" is that the folks that run the business are focused on the "turn rate" from a productivity perspective.

However, my responsibility to my clients is to protect them from unnecessary and potentially costly trading ideas.

My clients are encouraged to be "fee based" unless their portfolios are so static (bond ladders for example) that it is not economically viable. However, I do have a minimum annual commission/fee for my wealth management consulting work.

That being said, this is how I review client accounts at year end:

1) Cash flow analysis:

When I first sit down with a prospect, we have a "discovery" interview. From this interview we gather the information necessary to prepare a projected cash flow analysis prior to making any investment recommendations.

This cash flow analysis allows us to fully understand the clients needs and risk tolerance. It is my experience that even clients who think that they have a high tolerance for risk, do not, especially when that is put to the test in a declining market. If we know their lifestyle cash flow needs, we can actually see the risk that they can and should be taking.

At year end we review this and look forward for the next few years to make sure there is ample liquidity. It will depend on each specific clients needs: "portfolio builders" have usually net positive savings and higher risk tolerance, "portfolio utilizers" (who need their portfolios for lifestyle cash flow) have less room to take risk unless they need to generate significant amounts of income.

2) Portfolio diversity and re-balancing

If cash flow needs require portfolio adjustments, we look at total asset diversification, not just the portfolio but the clients entire net worth, including their exposure to real estate (home or vacation property) and their own business.

For example: a retired client needs $10,000 per month to cover lifestyle needs. They will need a minimum of $240,00 in cash/money market (2 years). Assume that this is 10% of their portfolio.

We will examine their portfolio holdings to ensure that income, dividends and capital growth are replenishing this pool of cash, because it is the clients wish to not reduce the principle (if possible) for estate planning reasons. (But they also have a participating life insurance plan to back up their needs).

This gives them the comfort of being able to be a little more aggressive to get the 10% annual return that they desire.

If any of the asset classes that they own have out-performed, we will re-balance: reducing exposure to the out-performers (i.e. taking profits) and redistributing it to the under-performers (who may just be the performers in the next phase of the cycle).

Most of our clients have 3rd party managers to whom we actively engage with these issues and we work through a number of combinations for adjustments:

Perhaps, for example, reducing exposure to Canadian Banks who have had a considerable capital return lately also making the portfolio "over-weight") and finding some diversification (and increased risk) in Income Trusts that have good yield and are expected to have limited impact on distributions when conversion occurs.



3) Tax efficiencies

We also confer with clients tax experts to ensure that we have a thorough understanding of the implications for clients on any transactions and work closely with the managers to find ways of minimizing the tax impacts of the portfolio adjustments (Tax Harvesting)

As in the above example, if the selling of a Canadian Bank was to have a significant capital gain, are there capital losses that could be taken to offset this without greatly impacting the portfolio? We often use sector ETF's to maintain exposure for the required 30 day period if we want to subsequently repurchase the sold position.

We like to keep things simple and boring and steady. We loathe volatility and find every way possible to reduce it, because we believe that over the long run, volatility is the enemy of any portfolio and wealth management plan. Recent history has proven our methodology to be correct. We have happy clients and that is why I am in this business: to make clients happy .

Want to be a happy client?
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Thinking ahead of the curve.