The Greenard Group’s 10 principles on how we pick stocks

Over the years I have been asked several times how we pick our stocks. The process for picking stocks really begins with our overall investment philosophy. All decisions are made in the context of achieving the best risk adjusted returns for the entire portfolio over a medium to longer term. Returns can be achieved through both distributions to shareholders (i.e. dividends) and share price appreciation. Here are a few principles we consistently have used over the years:

1) Zero speculation

Nearly all of our clients have one primary investments objective — capital preservation. Our clients have worked really hard for their money and they don’t want to lose it.

One of the guiding principles we believe in when picking stocks is investing for long term rather than speculating on any short term volatility. Sometimes people have asked me what the difference is.

One of the ways that I have described it is the mind set of thinking longer term (investing) and avoiding the temptation of shorter-term (speculating). It can be tempting to jump on the latest craze or hot stock pick suggested by a friend or neighbor in the hope of a significant gain in a shorter period of time.

One client told me years ago that he likes to grow wealthy slowly. He was willing to forgo all short term significant gain opportunities to ensure his capital was prudently invested in solid well-known companies. Avoiding the mistakes was more important than trying to hit home runs.

Although we steer away from giving advice for clients wishing to purchase speculative names, our general comment is to keep the position size small, hold it in a non-registered account (to claim the loss if it does not work out) , as future performance data will be impacted if our model portfolio recommendations are not adhered to.

2) Large capitalized companies only

Another guiding principal is avoiding smaller and medium capitalized companies. From our experience, the smaller and medium sized companies often have greater levels of volatility and greater risk.

Our equity selection process focuses 100 per cent on the largest capitalized companies within Canada, United States, and outside of North America. Our screening process first begins with approximately 1,200 constituents companies as follows the 500 largest companies in the U.S., the 350 largest companies in Europe, the 250 largest companies in Canada, and the 100 largest companies in the Asia/Pacific region.

We feel that a portfolio biased only to Canada has, and will continue, to underperform other markets over time. Although 1,200 individual companies may still seem like a lot, once the other principles below are applied the subset of companies narrows and becomes reasonable.

3) Corporate profitability

We will never purchase a company that is not profitable. The most simple of ratios to look at when assessing profitability is Earnings Per Share (EPS). If a company is not making money, it is automatically excluded. Projected growth in earnings or future outlooks provided by analysts can provide a good rationale for what will drive growth in earnings for the company.

We spend a significant amount of time reviewing internal and external research reports from analysts — with both positive and negative comments. Past profitability normally gets a company on the initial subset of companies to be considered, though future and current profitability are even more important.

4) High capital efficient companies

What does “high capital efficiency” mean? Let’s break it down to two terms we use returns on invested capital (ROIC), and free cash flow (FCF). All companies finance operations either through the issuance of debt or equity. The cost is the interest rates on the debt and dividend expectations on the equity.

Leverage is perhaps the one component we will focus on. A company that has internally sourced capital is always in a better situation then one that relies on external capital. A company that has low financial borrowing costs and leverage will have less dependence on external financing and external events. The more predictable a company’s ROIC and FCF are the better.

5) Lower leverage

If a company is profitable it can naturally expand its operations organically (with its own profits). If a company wishes to grow faster than the current profits allow, then it must choose to issue additional equity or debt to finance assets purchases or acquisitions.

Many advisers will look at various ratios to screen for good stocks. The financial leverage ratio is definitely worth looking at. It is relatively easy to calculate. From the financial statements you must determine the total debt of the company and the total equity held by shareholders. You simply divide the total debt by total equity. The normal rule of thumb is that this should not be above a level of 2.0, though some exceptions exist.

Leverage is essentially when a company borrows money with the expectation that the profits made from borrowing the money will be greater than the cost of the amount borrowed (i.e. the interest costs) . If a company is financing its operations by continually taking on debt and other liabilities then naturally it is riskier than a company with less leverage. This is especially the case in periods when interest rates are rising.

6) Prudently managed

Investing in companies that are prudently managed is a key component to any quality stock. This is particularly important as the landscape is constantly changing and we have to feel confident that management will make prudent changes to stand the test of time. Understanding what the company does is fundamental to selecting the stock. Management of the company should be able to provide information that makes sense.

A simple starting point is the company’s annual reports which are all available on each company’s website. My favourite section to read in financial statements is the “Management Discussion and Analysis”, also referred to as the MD&A.

An independent auditor must prepare and audit the company’s financial statements. The information is historical which immediately discounts its use from a planning standpoint.

The one exception is the MD&A statement. Although this statement is not audited it does give the management’s opinion on the current results (compared with previous results) and provides a forecast of future operations. Thoughts and opinions can be expressed that should include both positive and negative information. After reading the information you still don’t understand what the company does, or you do not agree with the future direction, then it’s best to avoid.

7) High cash in-flow

High net cash in-flow, consistent cash flows, and predictable cash flows are all attractive features to equities we add to the portfolio. If a company has a “burn rate” (term used to describe a company losing money and how quickly the company’s shareholder equity will be used up) it is automatically excluded on several grounds. A company must have high net cash-in flows to be considered in the model portfolios.

If companies have consistent earnings that are also predictable, we often refer to this as having an annuitized income stream. Royalty rights, contract obligations, licensing, subscription revenue, locked in contracts, membership fees, renting/leasing can all be sources of annuitized cash flow.

8) Competitive advantages

Within Canada, our favourite companies to invest in are those with a competitive advantage. We love companies that have a natural monopoly. Any business or industry that is capital intensive and has a high cost to entry is worth considering. In Canada we have some examples, such as banks, telecommunication, railways, and utilities.

We feel that well established companies that have competitive advantages are generally lower risk and have more predictable cash flows. They are lower risk in the sense that they do not have the immediate threats of new entrants to replace the product or service.

9) Corporate governance

One of the components we review is overall transparency and how that may impact shareholder returns. Transparency begins with the company policies, controls, compensation for executives, and communications to shareholders. We ask ourselves, is management providing clear information on the direction of the company that is understandable?

We always use caution if activities are overly complex and are not transparent. The more complex the accounting policies, the more scrutiny that needs to be put on a company. Are the executives and managements objectives also aligned with shareholder interests? Do we understand the direction the company is taking with any mergers, acquisitions or spinoffs?

10) Complimentary to other holdings

Our model portfolios typically have 30 to 35 holdings when fully invested. When we add or remove a stock from the model portfolio we must assess the impact of diversification and correlation. Typically when a stock is removed from a particular sector, we would replace it with a better holding option within the same sector.

Strategically we may change the weighting of sectors depending on our outlook for the economy and the stock market cycle. When adding stocks to a portfolio it is important to also look at how they are correlated to each other.

It’s important to have a disciplined approach to your criteria by which you pick stocks. If those criteria’s are stuck to consistently we feel that you’ll have fewer losses and more successes.

Kevin Greenard CPA CA FMA CFP CIM is a Portfolio Manager and Director, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week in the Times Colonist. Call 250-389-2138. greenardgroup.com

 

 

Rebalancing helps manage risk

Wouldn’t you love a strategy of selling high and buying low?

Naturally we have the tendency to want to let our winners run without taking profits.

On the flip side, a good stock might be going through a rough patch and, rather than sell the stock, adding to it might be the right move.

Creating a disciplined rebalancing process begins with determining the portion of your investments in cash, fixed income and equities.

Below we have mapped out our general structure rule with respect to the equity component. A holding is common shares in a single company (for example, Canadian Pacific Railway or Apple).

Clients who have between $500,000 and under $2.5 million will typically hold a minimum of 25 holdings. An optimal number of holdings is 30, and no greater than 35 holdings.

Portfolios between $2.5 million and $5 million we recommend holding a minimum of 30 holdings, optimal number of holdings is 35, and no greater than 40 holdings. We use the term “optimal” to describe the dollar amount invested in each company in normal markets conditions.

Reba Watson has a portfolio valued at $1.4 million. She has a moderate growth portfolio where 80 per cent, or $1,120,000, are held in equities. Based on her portfolio size and being moderate growth, we can illustrate rebalancing.

Optimal positions size

$37,333 (essentially the equity portion of $1,120,000 divided by 30). Without going through this exercise, one would not know what a normal position size is. I have heard people say I purchase 100 shares of everything. That simply does not work for a host of different reasons. The most obvious reason is that some stocks trade at very low prices/share and others at much higher prices.

Half position size

$18,667 (essentially half of the optimal position size). Sometimes we wish to underweight a holding or overweight a holding from a strategic sense in the short term. If we feel that the markets are getting long in the tooth, or late in the bull market cycle, then reducing position sizes can be a strategic decision. This reduction would help if markets declined or had a correction. Another example of utilizing half position sizes may be a new client that has never invested before, to get the level of comfort up we may suggest half positions sizes to begin with. As time goes on, we would typically work toward optimal positions sizes.

Rebalance position size

$44,800 (essentially the equity portion of $1,120,000 divided by 25). If the long term goal is no fewer than 25 names this is a natural starting point to calculating your rebalancing number. Whenever we are reviewing portfolios, one of the first items we look at is position size and if any holdings need to be rebalanced. For example, we purchased $35,000 of Microsoft initially for a client. Today, we see that the position size for Microsoft has increases to $47,744. At a minimum, we would recommend to reduce the position by $2,944 (down to the rebalance positions size) or reduce the position by $10,411 (down to the optimal position size).

Excessive position size

$70,000 (this is calculated taking the total portfolio value of $1.4 million and multiplying by five per cent). If a client chooses to take an excessive holding in one company we document the extra risk incurred within the Investment Policy Statement (IPS).

Rebalancing frequency

Over the years, several studies have been done to determine the frequency of rebalancing reviews. Should investors rebalance quarterly, semi-annually or annually? As the markets vary from year to year, the frequency should be adjusted based on current conditions. Rebalancing asset mix and individual position size can normally be done at the same time. Rebalancing to your optimal asset mix should be done at least once a year. Prior to rebalancing, it is important to periodically review your Investment Policy Statement (IPS) to ensure that you are comfortable with the asset mix. Changes in market conditions and interest rate outlook are factors to discuss with your wealth adviser when revising the asset mix within your IPS. Your personal goals, need for cash, and knowledge level may result in your optimal asset mix needing to be adjusted.

Rebalancing to Investment Policy Statement

When an Investment Policy Statement is set up the optimal asset mix is outlined. To illustrate, we will use Reba, who invested in a portfolio with the following asset mix —fixed income 20 per cent and equities 80 per cent. Asset classes do not change at the same rate. Over the last year, equities grew faster than fixed income making the growth in her portfolio uneven. If after a year we meet with Reba and her portfolio is $1.6 million. Based on the optimal asset mix outlined in her IPS, 20 per cent, or $320,000, should be in fixed income. The remaining $1,280,000 should be in equities. When we looked at Reba’s portfolio, she had $283,000 in fixed income, and the remainder in equities. A disciplined approach would result in us selling $37,000 of equities and purchasing fixed income.

Although it may seem counter intuitive to sell an asset class that is doing well or buy one that is not, however that is precisely what is required if the fundamental principle of “buy low, sell high” is to be followed. By rebalancing your portfolio, you are staying the course and increasing the potential to improve returns without increasing risk. Rebalancing also helps smooth out volatility over time.

Disciplined rebalancing can provide comfort by taking the emotion out of your investment decisions. It does not seem natural to sell a portion of your investments that has done well and buy more of those that have been more sluggish. This discipline allows a reassuring way to buy when it is difficult and sell when it seems counterintuitive. When markets are down, human nature would have us get out rather than buy low, but a disciplined rebalancing process can prevail in the long run.

Although at times, the changes in the market may not be large enough for an investor to feel that there is any need to rebalance, the benefit to doing so can be significant over the long run with compounding returns.

Other forms of rebalancing

A more complicated component of the rebalancing process looks at geographic and sector exposure. Often at times, investors will have no clear benchmark at the beginning to assess the geographic and sector exposure. Without these parameters outlined at the beginning it is more challenging to have a discipline approach to rebalancing. Professional judgment and current conditions often move the benchmark of how funds are invested. Interest rates, political news, government policies and other factors can determine geographic and sector weightings.

Tax efficiency rebalancing

When a client opens up new accounts or makes significant deposits and withdrawals, this is an ideal time to look at all levels of rebalancing. Even with smaller deposits into an RRSP or TFSA account, it may be a good time to rebalance. In some situations, certain investments have better tax characteristics in different accounts. For example, we try to put interest-bearing investments and those that pay other income (such as foreign income) within an RRSP/RRIF. Investments that generate capital gains and obtain the dividend tax credit are often better situated within a non-registered account.

Managed accounts provide piece of mind

A managed account is a broad term that has been used in the financial-services industry to describe a certain type of investment account where a portfolio manager has the discretion to make changes to your portfolio without verbal confirmation.

There are different names and types of managed accounts which may be confusing for investors when looking at options between financial firms. To assist you in understanding the basics of managed accounts, we will divide the broad category into two subcategories — individually managed accounts and group managed accounts.

Both individually managed and group managed are fee-based type accounts, as opposed to transactional accounts, where commissions are charged on activity. Individually managed accounts must be fee-based and generally have a minimum asset balance of $250,000.

Before we get into the differences between individually managed and group managed accounts, we should also note that strict regulatory and education requirements are necessary for individuals in the financial-service industry to be able to offer managed accounts. The designation portfolio manager is typically awarded to individuals who are able to open managed accounts. Financial firms may also stipulate certain criteria prior to allowing their employees to provide discretionary advice or portfolio management services. Examples of additional criteria that may be required by financial institutions include a clean compliance record, minimum amount of assets being managed, good character, and significant experience in the industry.

For the purposes of this article, the term investment adviser is different from portfolio manager.

A portfolio manager may have the ability to offer individually managed accounts on a discretionary basis, whereas an investment adviser does not. An investment adviser must obtain verbal authorization for each trade that they are recommending. A client must provide approval by signing the appropriate forms in order for the portfolio manager to manage their accounts on a discretionary basis.

Above, we noted the two broad types of managed accounts — individual and group. A portfolio manager is able to offer both individual and group accounts on a discretionary basis. The individual account is a customized portfolio where the portfolio manager is selecting the investments. Although an investment adviser is not able to offer individually managed accounts, they can offer group managed accounts through a third party.

A simple example of this is a mutual fund which is run by a portfolio manager. A more complex example of this is the various wrap or customized managed accounts offered by third party managers. An investment adviser can recommend to their clients a third party group-managed account.

The role of an investment adviser in a group-managed account option is to pick the best third party manager and to assist you with your asset allocation. When looking at this option, you must weigh the associated costs over other alternatives. The group-managed account has set fees. With individually managed accounts, the portfolio manager has the ability to both customize the portfolio and the fee structure.

Trust is an essential component that must exist in your relationship to grant a portfolio manager the discretion to manage your accounts. Prior to any trades, the portfolio manager and investor create an Investment Policy Statement (IPS) to set the trade parameters for the investments. The IPS establishes an optimal asset mix and ranges to ensure that cash, fixed income, and equities are suitable for the investors risk tolerance and investment objectives.

Quicker Reaction Time: Having a managed account allows the portfolio manager to react quickly to market changes. If there is positive or negative news regarding a company, the portfolio manager can move clients in or out of a stock without having to contact each client individually. With markets being volatile this can help with reaction time. For an investment adviser to execute the movement in or out of a stock, it would involve contacting each client and obtaining verbal confirmation.

Strategic Adjustments: If a portfolio manager has numerous clients and would like to raise five per cent cash, this can be done very quickly with an individually managed account. It is more difficult for an investment adviser to do this quickly as verbal phone confirmation is required for each client in order to raise cash. Even with a group- managed account, an investment adviser would have to contact each client to change the asset mix weighting.

Rebalancing Holdings: With managed accounts, clients have unlimited trades. This is important as it allows a portfolio manager to increase or decrease a holding without being concerned about going over a certain trade count. As an example, we will use a stock that has increased by 30 per cent since the original purchase date. Trimming the position by selling 30 per cent is easy for a portfolio manager as a single block trade can be done. This block trade is then allocated to each household at the same price. If an investment adviser wanted to do this same transaction, it would likely take multiples days/weeks and over this period each client would have a different share price depending when the verbal confirmation was obtained.

Extended Holidays: If you are travelling around the world or going on a two month cruise, then you probably want someone keeping an active eye on your investments. An investment adviser is not able to make changes without first verbally confirming the details of those trades with you. A portfolio manager is able to make adjustments within the IPS parameters, provided you have a managed account set up before your departure.

Aging Clients: When our clients are aging, we often recommend that they introduce us to their family members and the people they trust. We encourage most of our clients to set up a Power of Attorney (POA) and to plan for potential incapacity later in life. Portfolio managers have a distinct advantage in this area as we can have a meeting with the family and document everything very clearly in an IPS. Having managed accounts, clearly documented IPS, and a POA will ensure that a portfolio manager can continue managing the investments appropriately.

Not Accessible: If you work in a remote area (mining or oil and gas industry), chances are you may be out of cell phone reach from time to time. In other situations, your profession does not easily allow you to answer phone calls (a surgeon in an operating room). In other cases, a lack of interest may result in you not wishing to be involved. A managed account may be the right option for clients that are frequently difficult to reach to ensure opportunities are not missed. In these situations, the portfolio manager can proactively react to changing market conditions.

Managed accounts greatly simplify the investing process for both you and the portfolio manager. It enables our clients to focus on aspects of their life that are most important to them while knowing that their finances are being taken care of.

Kevin Greenard CPA CA FMA CFP CIM is a portfolio manager and director of wealth management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week in the Times Colonist. Call 250-389-2138.

 

Act today to minimize a massive final tax bill

Taxpayers, naturally, are fixated on trying to minimize tax in the current year. This is a classic scenario of someone not being able to see the forest for the trees. The forest is your ultimate final tax liability. The trees are the current year taxes. The final tax bill in Canada consists of any income up to the time of death, accrued gains are deemed to be realized at the same time and estate administration tax (probate fees).

Annually, in early June we will look at our client’s tax returns and see the level of taxable income and tax payable they incurred in the current year. When the current tax payable is too low we may schedule an estate planning meeting.

The estate planning meeting typically starts off by a rough tax calculation of what your final tax liability would be today, based on your current assets, if you were to pass away. If you have not gone through this exercise, then it is worth doing. In some cases, the government stands to inherit a significant portion of your net worth if not structured appropriately. The conversation is setting the framework for a more detailed analysis done as part of the financial planning process.

Throughout our working lives we commonly reduce our annual tax bill by making Registered Retirement Savings Plan (RRSP) contributions. An important item for people to understand is the tax consequences when withdrawals are made and also the tax consequences upon death.

Withdrawals from registered accounts are generally considered taxable income in the year the payments are made. Over time your RRSP account may have generated different types of income including dividend income, interest income and capital gains. All of this income would have been deferred. All RRSP and Registered Retirement Income Fund (RRIF) withdrawals are considered ordinary income taxed at your full marginal tax rate regardless of the original type of income.

When a registered account owner dies, the total value of their registered account is included in the owner’s final tax return. The final tax return is often referred to as a terminal tax return. The proceeds will be taxed at the owner’s marginal tax rate. The highest marginal tax rate (British Columbia and federal) is currently 49.8 per cent. An individual that has $800,000 in an RRSP/RRIF account may have to pay $398,400 of that amount to Canada Revenue Agency in income taxes. If the RRSP names the estate as beneficiary, then an estate administration tax or probate fee of approximately $11,200 would apply. Accounting, legal, and executor costs can result in less than half being directed to your beneficiaries and more than half going to taxes and other fees.

These taxes must be paid out of the estate. CRA considers you to have cashed in all of your registered accounts in the year of death. Paying over 50 per cent of your retirement savings to CRA is not something investors strive for. There are a few situations where this tax liability can be deferred or possibly reduced.

Spouse

Registered assets can be transferred from the deceased to their spouse or common law spouse on a tax-free rollover basis provided they are named as beneficiary. The rollover would be transferred into the spouse’s registered account provided they have one. If the spouse does not have a registered account, they are able to establish one. The registered assets are brought into income on the spouse’s return and offset by a tax receipt for the same amount. This rollover allows the funds to continue growing on a tax-deferred basis. The rollover does not affect the spouse’s RRSP contribution room.

If your spouse is specifically named the beneficiary of your RRIF account, then you should consider designating your spouse as a “successor annuitant.” As a successor annuitant, the surviving spouse will receive the remaining RRIF payment(s) if applicable and obtain immediate ownership of the registered account on death. These assets will bypass the deceased’s estate and reduce probate fees. You should discuss all estate settlement issues with your Wealth Advisor and financial institution to obtain a complete understanding.

Minor child or grandchild

Registered assets may be passed onto a financially dependent child or grandchild provided you have named them the beneficiary of your registered account. In order to be financially dependent, the child or grandchild’s income must not exceed the basic personal exemption amount. A child that is under 18 must ensure that the full amount is paid out by the time that child turns 18.

Financially dependent child

A child of any age that is financially dependent on you can receive the proceeds of your registered account as a refund of premiums. This essentially means that the tax will be paid at the child’s marginal tax rate, likely to be considerably lower than your marginal tax rate on the terminal tax return.

Rollover to Registered Disability Savings Plan

In 2010, positive changes occurred to help parents and grandparents who have a financially dependent disabled child or grandchild. Essentially this enables the RRSP accounts of parents and grandparents (referred to as the annuitant) to be rolled over to the RDSP beneficiary. The estate benefit is that up to $200,000 of the annuitant’s RRSP can be transferred to the beneficiary’s RDSP. Care should be taken to make sure the transfer qualifies under current tax rules and thresholds. The end goal is to minimize tax and hopefully your beneficiaries receive a larger inheritance. We recommend you speak with a Wealth Advisor if you are considering naming a disabled child or grandchild the beneficiary of your registered account.

Rollover to Registered Retirement Savings Plan

The RDSP is my favourite option for rollover, but what happens if the RRSP/RRIF is greater than $200,000 (the maximum rollover for the RDSP)? Another good option to explore if the child is dependent on you by reason of physical or mental infirmity is the tax free rollover of the registered account (i.e. RRIF) into the disabled child’s own registered account (i.e. RRSP). With disabled children there are no immediate tax consequences and there is no requirement to purchase an annuity. You may want to discuss the practical issues relating to having your registered account rolled into registered account in the name of a disabled child.

Other planning options for children with disabilities

A combination of the RDSP and RRSP rollover is normally sufficient if the annuitant has a small to medium sized RRSP/RRIF account. Other planning options are available if you have a sizable RRSP and are worried about disabilities payments from the government.

Beneficiaries

Care should be taken when you select the beneficiary or beneficiaries of your registered accounts. If you name a beneficiary that does not qualify for one of the preferential tax treatments listed above, then it could cause some problems for the other beneficiaries of your estate. An example may be naming your brother as the beneficiary of your RRSP and your children as beneficiaries of the balance of your estate. In this example, the brother would receive the full RRSP assets and the tax bill would have to be paid by the estate, reducing the amount your children would receive.

Important points

Every individual situation is different and we encourage individuals to obtain professional advice. Below we have listed a few general ideas and techniques that you may want to consider in your attempt to reduce a large tax bill:

  • Pension credit — you should determine if you are able to utilize the pension tax credit of $2,000. If you are 65 or older, then certain withdrawals from registered accounts may qualify for this credit. Rolling a portion of your RRSP into RRIF would allow you to create qualifying income. For couples this credit may be claimed twice – effectively allowing some couples to withdraw up to $4,000 per year from their RRIF account(s) tax-free (provided they do not have other qualifying pension income).
  • Single or widowed — single and widowed individuals will incur more risk with respect to the likelihood of paying a large tax bill. Single and widowed individuals should understand the tax consequences of them dying as no tax deferrals are available.
  • Charitable giving — one of the most effective ways to reduce taxes in your year of death is through charitable giving. Those with charitable intentions should meet with their professional advisors to assess the overall tax bill after planned charitable donations are taken into account.
  • Life insurance — one commonly used strategy is for individuals to purchase life insurance to cover this future tax liability. The tax liability created upon death coincides conveniently with the life insurance proceeds. This would enable individuals to name specific beneficiaries on their registered account without the other beneficiaries of the estate having to cover the tax liability.
  • Estate as beneficiary — if you name your estate the beneficiary of your registered account then probate fees will apply. An up-to-date will provides guidance on the distribution of your estate.
  • Life expectancy — Individuals who live a long healthy life will likely be able to diminish their registered accounts over time as planned. Ensuring your lifestyle is suitable to a longer life expectancy is the easiest way to defer and minimize tax.

A wealth adviser should be able to generate a financial plan to review with you and your accountant. The financial plan should outline the tax your estate would have to pay if you were to die today. This will begin a conversation that may allow you to create a strategy that reduces the impact of final taxes on your estate and throughout your lifetime.

Kevin Greenard CPA CA FMA CFP CIM is a Portfolio Manager and Director, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week in the Times Colonist. Call 250-389-2138.

 

Enhancing financial growth through re-investment

Not everyone who purchases investments wants or needs the income today. Many clients are trying to grow a nestegg to fund a future goal, such as retirement. Investors who are not requiring income may want to invest in growth stocks that pay either no dividend or minimal dividends. It is my opinion that good dividend-paying stocks should be part of nearly every portfolio. The income earned on these stocks can also help build the nestegg.

Many investments have both a growth and income component. Fortunately, most of these same companies offer the dividend reinvestment program — often referred to as a DRIP. Growth is often achieved through price appreciation of the investment and also reinvesting the income.

Stock dividends or cash dividends

Companies have the choice to pay stock dividends, which effectively means shareholders receive stock of the company. The most common type of dividend is a cash dividend. With a cash dividend, the default is for cash to be paid into the account in which the position is held. Once the dividend is paid, the cash sits in the account and unless it is invested right away, will not be earning anything. The DRIP program is perhaps the most efficient way to keep the dividend still growing — income on income.

DRIP illustration

An investor purchased 400 shares of the common shares of ABC Corporation, currently trading at $100. Total invested would be $40,000 (400 x $100). The current quarterly dividend is set at .45 per share. Based on these values, when the dividend is payable, the investor would receive (400 x .45 / $100) about one share of ABC and $80 cash. After the dividend, the investor would own 401 shares.

Adjusted Cost

The DRIP program has investors acquiring shares at different prices with each dividend being reinvested. For taxable accounts, it is important to keep track of the costs at which the new units were reinvested. The cost of the original purchase plus the total value of the shares reinvested on the date of the DRIP, equals the adjusted cost base.

Stock splits

When a stock has a split, this often means more shares and less cash on the DRIP. Using a two-for-one stock split as an example you will see this is normally good for people who have the DRIP set up.

Let us use the above as an example, in a two-for-one stock split. Before the split, the investor owns 400 shares with a market value per share of $100. Total invested would be $40,000. After the split, the number of shares would double to 800, and the market value per share would decline to $50. Total invested would remain at $40,000. The dividend itself would be lowered to .225 per share.

Based on the new quantity, stock price and dividend amount, the investor would receive ($800 x .225 / $50) three shares of ABC and $30 cash. After the split and dividend the investor would own 803 shares.

Tax effect

Although the investor above may have requested that their dividends be reinvested, the dividend income will still be considered income for taxable accounts in the year the dividend was declared. Investors will receive the applicable taxation slips and should ensure they have sufficient cash on hand at the end of the year to pay any tax liability. DRIPs in an RRSP account are ideal as any income is deferred and is not taxed immediately.

Fractional shares

Unlike mutual funds, it is not possible to have fractional shares of common shares. The illustration above highlights that the fractional portion (less than the amount to purchase a whole share) is paid as cash into the investment account. Stock splits are generally a good thing for individuals that have the DRIP program. Share prices are generally reduced resulting in a greater portion of the dividend being reinvested.

Discount to shares

Not all companies pay a DRIP. Of those companies that offer a DRIP, some of those may offer a discount on the share price of the amount reinvested. These discounts typically range from one to five percent. How the discount is calculated can change for each company that offers it. It is not uncommon for a stock to have a discount in the past and then remove the discount. It is often dependent on the corporations need for capital.

Odd lots

Years ago, investors were warned that they may have difficulties selling shares of companies if they had an odd lot. A lot is generally considered 100 shares. One can easily see how the DRIP program would result in an odd-lot situation. Today this is less of a concern for any position that has a moderate volume of shares traded daily. With reorganization, spin-offs and computerized trade execution many investors have odd lot holdings.

Position size

Investors should take care to monitor their position sizes. Investors may find over time that certain positions that are set up as a DRIP may become overweight within their overall portfolio. Investors who have charitable intentions may want to consider donating shares or sell a portion of their holdings as a means to rebalance the portfolio.

Cancellation

A DRIP can easily be cancelled. An investor may want to cancel a DRIP when they begin to require income from their investments. Setting up a drip and cancelling a DRIP are very easy.

Growth oriented investors may find the DRIP a low maintenance way of dollar cost averaging while reducing the costs of investing and employing cash that may otherwise be earning a low return in an account. The DRIP allows compounding of investment returns which can enhance total returns.

Kevin Greenard CPA CA FMA CFP CIM is a portfolio manager and director, wealth management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week in the Times Colonist. Call 250-389-2138.

 

Measuring your tolerance for volatility and risk

People are often told not to invest in equity markets unless they have a long-term time horizon. While for some people one to two years might seem like a long time, most investment professionals feel a long term time horizon would be seven years or greater.

Here is some perspective as to what the markets have done over the past two decades in Canada. Between Jan. 1, 1999, and Dec. 31, 2018, the S&P/TSX Composite Index returned a total of 260.50 per cent. This represents an annualized compound rate of return of 6.62 per cent. Most decades the compound rate of return for equities has been declining.

The actual annual percentage returns (losses) of the S&P/TSX Composite Index were as follows:

  • 1999 (29.7)
  • 2000 (6.2)
  • 2001 (-13.9)
  • 2002 (-14.0)
  • 2003 (24.3)
  • 2004 (12.5)
  • 2005 (21.9)
  • 2006 (14.5
  • 2007 (7.2)
  • 2008 (-35.0)
  • 2009 (30.7)
  • 2010 (14.4)
  • 2011 (-11.1)
  • 2012 (4.0)
  • 2013 (9.6)
  • 2014 (7.4)
  • 2015 (-11.1)
  • 2016 (17.5)
  • 2017 (6.03)
  • 2018 (-11.64)

To summarize, we noted that in the past 20 years there have been six years where the S&P/TSX Composite Index posted declines. For the same time period, the S&P/TSX Composite Index posted 14 years in which there were positive returns. We also noted the extremes of a loss of 35.0 per cent in 2008 immediately followed by a gain of 30.7 per cent in 2009. The above information reinforces something we already know — the stock market does not move in a straight line.

An important component to investing is having an Investment Policy Statement (IPS). One component to an IPS is establishing your investment objectives and risk tolerance for each account and outlining the type of portfolio you want.

The above annualized 6.62% rate of return over the last 20 years assumes a 100 per cent Canadian Equity portfolio mirroring the index. Of course, many investors may have fixed income and investments outside of Canada. With interest rates being at low levels, many investors would have opted to decrease fixed income and increase the equity component to achieve greater long term returns.

We encourage most investors wishing to overweight equities to focus on well selected medium risk securities. The higher annual growth you desire, the greater degree of risk you will have to assume. Normally this means increasing the equity portion of the portfolio. The types of equities you purchase are almost as important as the asset mix you choose. Increasing risk in your portfolio does not always equate to higher returns. When you add speculation and high risk into the portfolio, then you also add the possibility of severe corrections if the markets move in a negative direction. High-risk and speculative portfolios run the possibility of experiencing an extreme negative year (i.e. 2008 and 2015).

How does a negative year in the markets impact the investor’s portfolio? The table below shows how the first year investment returns effects the average annual returns required to reach respective targets of six, eight, and 10 per cent.

Potential reward for risk-tolerant investors

 

Annual First Year                  
Growth   Actual Time horizon to meet your annual growth target *    
Target Returns          1          2          3          4          5          6          7          8          9
                     
  15%    (2.3)      1.8      3.2      3.9      4.3      4.6      4.8      4.9      5.0
6% 5%      7.0      6.5      6.3      6.3      6.2      6.2      6.1      6.1      6.1
-5%    18.3    12.0      9.9      8.9      8.3      8.0      7.7      7.5      7.3
  -15%    32.2    18.4    14.1    12.0    10.8    10.0      9.4      9.0      8.6
  15%      1.4      4.7      5.8      6.3      6.7      6.9      7.0      7.2      7.2
8% 5%    11.9      9.5      9.0      8.8      8.6      8.5      8.4      8.4      8.3
-5%    22.8    15.2    12.7    11.5    10.8    10.3    10.0      9.7      9.6
  -15%    37.2    21.7    17.0    14.7    13.3    12.4    11.8    11.3    10.9
  15%      5.2      7.5      8.4      8.8      9.0      9.2      9.3      9.4      9.5
10% 5%    15.2    12.6    11.7    11.3    11.0    10.9    10.7    10.6    10.6
-5%    27.4    18.4    15.5    14.1    13.3    12.7    12.3    12.0    11.8
  -15%    42.4    25.1    19.9    17.3    15.8    14.8    14.1    13.6    13.2
                     
* Required average annual return to reach stated annual growth target (with different outcomes)

An investor who began investing in early 2001 or 2002 may have a significantly different outcome then an investor who began investing in early 2003 or 2009. When we have new clients that have a lump sum to invest from selling a home or receiving an inheritance, we communicate the importance of reducing market risk. Several simple strategies exist to reduce this risk.

To illustrate, we will use a made up example of John Smith, 50, who plans to retire in five years. John has been managing his own investments and has determined that he requires annual growth of six per cent each year to reach his retirement goals.

A positive outcome after year one would be growth of six per cent or greater. Assuming markets are good, let’s say John’s portfolio returns 15 per cent in the first year. If we look at the table we see that John can now reach his objective by returning only 3.9 per cent for the remaining four years. John should consider shifting his portfolio to be more conservative based on the lower annual growth requirement to reach his goal and rebalance his portfolio.

The attached table is very effective in illustrating the impact of negative outcomes. Instead of earning 15 per cent in the first year, what if John’s portfolio declined 15 per cent? In order for John to get back on track he would have to earn 12 per cent each year for the next four years. Although this is achievable, it is significantly more difficult to achieve than six per cent annually.

The key point to take away is that portfolios should be structured with the appropriate amount of risk.

As your return expectations increase, so does your exposure to the stock market. Although the stock market is biased in the long run to increase, there will likely be both positive years and negative years over your time horizon.

Kevin Greenard CPA CA FMA CFP CIM is a portfolio manager and director, wealth management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week in the Times Colonist. Call 250-389-2138. greenardgroup.com

 

Looking at total rate of return rather than yield alone

Yield is essentially the income an investment will pay, such as interest or dividend payments, and is normally expressed as a percentage.

Yield will fluctuate on equity investments based on the current share price. Typically, as the share price goes up, the yield goes down. On the flip side, as the share price goes down, the yield goes up.

The board of directors of a company makes the decision with respect to the dividend(s) the company will declare. This is normally stated as a dollar amount. Using ABC Bank as an example, the share price of the bank is currently at $80 per share. The board of directors would like the annual yield to be approximately four per cent. The board declares a dividend of $0.80 per share for the current quarter. If this dividend was kept the same for the next three quarters, the annual distribution would be $3.20 per share owned. Assuming the share price stays the same, the annual yield would be four per cent ($3.20 / $80).

The board of directors can choose to increase the dividend, and this is often done when the stock price appreciates. If the share price for ABC Bank increased to $100 per share, the yield would drop to 3.2 per cent ($3.20 / $100). The board of directors would have to begin declaring a quarterly dividend of $1 per share to maintain a four per cent annual yield based on shares valued at $100.

It is always nice when your investments will return dividends to you. The dividends are normally only part of the equation when looking at the holdings for your account. The change in the share price is also another important part to every investment. An investment that just pays income, with little hope of capital appreciation, would typically be classified as an “income” investment. An investment that does not pay a dividend, would typically be classified as a “growth” investment. The rate of return on a growth investment, that does not pay a dividend, would be 100 per cent determined by the change in the share price.

Many companies would be considered “balanced,” meaning that they would pay some form of dividend and also have an expectation of share price appreciation. As an example, three companies all make the same level of income in a given year, say six per cent. The first company chooses to pay a six per cent dividend to shareholders. The second company chooses to pay a three per cent dividend to shareholders and retain three per cent. The third company chooses to not pay a dividend and retain the full six per cent. When a company does not pay out some, or all, of its earnings, the share price would normally appreciate in value. Of course, many other factors influence the share price.

In the above example, we would anticipate that the share price for the third company would increase greater than the first company. Total return on an equity investment is the sum of the dividend plus the change in the market value of the shares.

Capital deployment

One of the many important components for us when we are analyzing new companies to add to the model portfolios is deployment of capital. As a portfolio manager, we are always assessing management and how they deploy capital that they are not distributing. If a company distributes all of its earnings, it is not necessarily building up extra capital. Investors will receive the dividends and it is up to the individual investors to ensure those returns are reinvested for continual growth.

Income needs

Retirees often require regular income from their portfolio. If we are sending monthly amounts to clients, this is often referred to as a Systematic Withdrawal Plan. The natural tendency when income is needed is to look at only stocks that pay a high level of dividends. Within our clients’ Investment Policy Statement, we outline the cash-flow needs that they have for the next two to three years. In the majority of cases, we create a one to two year wedge, the portion of the portfolio that is not in any equity (dividend or no dividend) — it is set aside in a cash-equivalent type investment that will not be impacted by changes in the stock market. We refer to this as a wedge. When a wedge is created, it takes the pressure off of a portfolio to create dividends to replenish cash. The focus can then shift to ensure you pick the best risk adjusted total rate of return group of investments. Some of those investments will pay large dividends, some smaller dividends and some no dividends.

Fixating on yield

I have had many conversations with clients about the danger of being fixated on yield. Occasionally, I will have someone ask me about some “high yielding” names that are paying very high dividends. In some cases, we will see that the companies are distributing more than they are actually earning which is not sustainable. In other cases, we see people being caught in the “income trap” and not factoring in the capital cost of the investment. As an example, you purchase 1,000 shares at $10 per share of High Yield Company totalling $10,000. You purchased this company because you read in the paper it is paying a six per cent dividend. If after a year the share price drops to $9.40 then the market value of this company would only be $9,400. The dividend of $600 would be taxable despite you really not making any real return if you were to liquidate at the end of the year. Essentially, a high yield is only part of the equation. An equally important component, if not more important, is the base amount invested in each company.

Universe of investments

If an investor focuses only on higher dividend paying stocks, much of the investment universe would be excluded as an option. Many dividend paying stocks are interest rate sensitive. Many sectors such as technology and certain communication stocks are known to have either no yield or low yields. Adding a mixture of income and growth investments reduces risk in a portfolio and should help smooth out volatility in the long run.

Kevin Greenard CPA CA FMA CFP CIM is a portfolio manager and director of wealth management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week in the Times Colonist. Call 250-389-2138.

 

It’s tough to get it right on both sides of the equation

During the last quarter of 2018, the TSX/S&P Composite declined 10.11 per cent on a total return basis while the first quarter of 2019 the TSX/S&P Composite posted gains of 13.27 per cent on a total return basis.

 

 

When the stock market takes a sharp downward correction, the natural response from investors is to try to anticipate the decline and sell off before this happens.

It sounds easy when you are looking in the rear view mirror. Timing when you are in or out of the markets is in essence basing your investment strategy on a speculative approach rather than a disciplined investing approach that incorporates a long-term vision and goals. Short-term emotional thinking can cloud long-term investment decisions.

 

 

The best way to illustrate the challenges of trying to time the stock market is by looking at an investor who is currently fully invested.

Mr. James has $1 million invested in a non-registered account and is currently earning $35,000, or 3.5 per cent, in annual income (primarily dividend income and minimal interest income). In addition to this income, Mr. James’s investments have averaged 4.5 per cent annually in capital gains over time.

 

 

The total annual average rate of return is the sum of both of these parts — the income and capital gains. The total average annual rate of return over the last five years has been approximately 8.0 per cent annually.

Mr. James decided that he wanted to be a market timer. By market timer, I mean that he felt he could predict the direction of the stock market and would sell his investments if he anticipated a decline in the markets.

If Mr. James sells off his investments and converts his portfolio to 100 per cent cash, then his income will drop to $16,000 per year, assuming that savings accounts are earning 1.60 per cent.

The downside to savings accounts is that interest income is fully taxable each year in a non-registered account. Mr. James currently has the majority of his investments earning tax-efficient dividend income with some tax deferred growth. As a result of the difference in taxation between interest income and dividend income, the impact on income would be even greater than 1.90 per cent (3.50 to 1.60).

For purposes of this article, we have assumed that both interest income and dividend income are equal. In additional to the differential in the income lost, Mr. James would not have potential for capital gains while out of the market.

Mr. James should also factor in that if all of his investments are sold then he would have to report all the realized gains on his investments and lose the deferral benefits that exist with non-registered equity investments. If you have stock that has increased in value, you do not have to pay tax on the capital gain until it is sold.

If Mr. James has a stock that has declined in value and he realizes a loss then he has to use caution when timing transactions. He must wait at least 30 days before repurchasing a stock sold at a loss or risk violating the superficial loss rules and having the original loss declined.

From an income standpoint, Mr. James will immediately see his dividend/investment income drop $19,000 a year ($35,000 to $16,000). He will also possibly be losing capital growth on his portfolio. The potential tax liability, superficial loss rules and loss of income are the easy components to quantify for Mr. James. It is the change in the capital side or growth that is the tough part to compute in order to determine if Mr. James made the right decision to liquidate.

If the markets increase, Mr. James clearly made a mistake. He will have lost the differential in the income and the capital growth. If the markets remain flat, Mr. James still made a mistake with the differential as his income will drop $16,000 a year.

If the stock market goes down, it’s not necessarily a given that Mr. James will benefit from having liquidated his account.

If Mr. James makes a correct prediction that the stock market declines then for him to benefit he has to also make another correct timing decision to buy back into the market at lower levels to potentially be better off.

If the markets decline and Mr. James does not have the insight to buy back in (before it rises back to the level that Mr. James originally sold at) then he would still be worse off. In essence Mr. James has to make two correct timing decisions: (1) selling before the markets decline, and (2) buying back before they rise.

Mr. James should also factor in the timing in which he feels his predictions for the market will unfold. To illustrate this component we will assume no transaction costs, only the income component (we will exclude capital changes) and no tax impact to the trades for simplification purposes.

The difference between the current income Mr. James is earning of 3.5 per cent and the new income of 1.60 per cent if he converts everything to cash is 1.90 per cent. Depending on how long Mr. James is out of the market impacts how much the stock market would have to decline to make the strategy of going to cash successful.

Let’s assume that Mr. James waits six months, one year, two years and three years before buying back into the stock market. If every year Mr. James is losing 1.90 per cent in income then the longer he waits the greater the stock market has to decline. At the six month point, the markets would have to decline 0.95 per cent (1.90 x .5) or greater, at the one year point the markets would have to decline 1.90 per cent (1.90 x 1) or greater, at the two year point the markets would have to decline 3.80 per cent (1.90 x 2) or greater, and at the three year point the markets would have to decline 5.70 per cent (1.90 x 3) or greater.

Making two correct short-term timing decisions against a stock market that has a long term upward bias is not as easy as it may seem. The markets can rebound incredibly fast — the 13.27 per cent increase in the first quarter of 2019 is only one example. From a psychological standpoint, most people would have the tendency to fear that the markets will decline further after the 10.11 per cent decline in the last quarter of 2018. Most investors would not have had the natural tendency to purchase investments at the beginning of this year. Sticking to a long term disciplined strategy helps deal with the short term quarterly swings of the market.

Kevin Greenard CPA CA FMA CFP CIM is a portfolio manager and director of wealth management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week in the Times Colonist. Call 250-389-2138.

 

 

Asset mix should be tied to cash-flow needs and market conditions

The term asset mix refers to the portion of your investments that are held in cash, fixed income, and equities. Asset mix has historically been touted as the most important decision with respect to managing risk adjusted returns. We don’t disagree.

The key question that many people should be asking themselves is the portion of their portfolios that should be in these three categories. Every decade we feel investors have had to shift how they look at asset mix to maintain the best risk adjusted returns. This has largely been the result of declining interest rates.

Rather than rely on older textbook solutions to asset mix we feel clients should focus on cash flow needs and current market conditions. When we meet with clients, one of the first questions we ask them is if they need any cash from their portfolio. Essentially we are asking them the time horizon of a portfolio and whether they are planning to make a significant withdrawal of funds. In more than 90 per cent of times when we ask clients this question, the majority of the investment portfolio is to be invested for the long term (greater than seven years).

We also ask clients whether they have any income requirements from the portfolio, or smaller withdrawal requirements. Many of our retired clients will request that we send them monthly cash flow from their investments. If a client desires $5,000 per month from their portfolio then we would typically put aside 12 to 24 months of cash as a “wedge” earmarked for these smaller withdrawals. This is done to ensure that investments do not have to be sold at the wrong time in the market cycle.

We also ask clients if they will require any significant withdrawals from their portfolio in the next three years. Examples of significant withdrawals will be funds to repair home (i.e. roof), renovations, new vehicle, recreational (i.e. boat, motorhome) and real estate purchases. These amounts are also documented within an Investment Policy Statement and earmarked as part of the “wedge” to ensure the funds can be liquidated and sent when needed regardless of market conditions.

We feel cash flow needs and current market conditions should be the primary determinate for asset mix. To give you an example of older guidance often used with respect to asset mix we have outlined a few observations by decade below.

The 1980s

In the 1980s, interest rates were high and many advocated for retirees to transition portfolios to 100 per cent fixed income. This was during a period when bonds, GICs, CSBs, CPBs, and term deposits actually returned a decent level of interest income to live off. Purchasing annuities was a popular option as yields were significantly higher and translated to higher payouts. Financial plans which make long term assumptions based on 1980s high interest rates were materially over stated when interest rates subsequently declined in future decades.

The 1990s

In the 1990s, the strategy most promoted was to encourage investors to have the fixed income percentage equal to their age. The idea was that as you are aging your portfolio would shift into more conservative investments that paid income to you in retirement. Fixed income still generally had higher income than equities.

The 2000s

In the 2000s, many promoted the strategy of laddering your bonds and fixed income. A bond ladder means you have different bonds with varying maturity dates. This was a way of spreading out interest rate risk. As bonds matured in the ladder, you could use some of the capital if necessary and reinvest the remainder.

The 2010s

Bond laddering started to decline as interest rates started to bottom out. Most economists, and fixed-income bond managers, were recommending to keep the bond duration (term to maturity) shorter. The reason for this is the inverse relationship that bond yields have to the bonds actual price. For example, if interest rates go up, most existing bond prices would decline. The greater the duration of the bond, the greater the decline typically.

To deal with this uncertainty of interest rates, many hybrid type investments were created that had features (resets, call dates). Most of these types of investments lack significant volume and can have material price swings which was not typical of fixed income type investments.

The present and the 2020s

Fast forward to today and what we anticipate in the decade ahead. The following are the top ten bullet points we discuss with our clients:

1) Many chief investment officers and economists feel that central banks simply can’t afford to raise interest rates significantly above current levels. The level of government debt would only spiral out of control further. Interest rates are most likely to stay at low levels for a long time.

2) In Canada, we have raised interest rates five times since the historic lows reached in 2017. If the economy softens, the Bank of Canada is in a position to cut interest rates.

3) The term “fixed income” seems rather archaic when many fixed income rates can shift with many of the new fixed income products. The term step up and floating are just a couple of the terms using in fixed income today.

4) It is ironic that most equities have a higher level of dividend income then the interest yields on fixed income. If investors want high income they can typically achieve this with good quality dividend paying equities.

5) Most bonds pay “interest income,” which is fully taxable in non-registered accounts. Canadian equity investments pay tax efficient dividend income (eligible for the dividend tax credit). All equity investments in a non-registered account can provide deferral of unrealized gains and tax preferred treatment on disposition (only 50 per cent is taxed).

6) Bonds trade outside of an exchange and the price transparency is not as good as equities which trade on an exchange. With most bond purchases, the financial firm you are dealing with is acting as principal, rather than as agent. With a principal transaction, the firm will buy the bond off of the client and put it in their own inventory of bonds to either hold or resale.

7) Fixed income often lacks a high volume of transactions (i.e. preferred shares) and is also susceptible to material price fluctuations. Some fixed income lack liquidity (i.e. longer term GICs and term deposits).

8) Increased scrutiny by regulators of suitability of asset mix on investment portfolios. This creates a natural tendency to possibly be overly conservative unless a full discussion is done with your portfolio manager or wealth adviser. Importance of communicating cash flow needs (both short term income requirements and required significant withdrawals).

9) Conservative investors choosing to have asset mixes heavily weighted in fixed income should have lower return expectations for the next decade ahead. Interest rates will likely stay at low levels for a long time. With even a moderate level of inflation and full taxation on income, after tax returns will not be the same as the past several decades.

10)In order to achieve the best risk adjusted returns, investors will have to invest more heavily in equities than past decades. This means that investors will have to deal with more market volatility and stick to a disciplined plan. Our recommendation for retirees who are opting to increase equity components in their portfolio is to avoid high risk and speculative positions.

It is crucial when working with a portfolio manager or wealth adviser to map out cash flow needs and any significant withdrawals. It is only after that is completed that an appropriate asset mix can be set up and the best decisions can be made on where to draw on those cash flow needs.

Kevin Greenard CPA CA FMA CFP CIM is a portfolio manager and director of wealth management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week in the Times Colonist. Call 250-389-2138.