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How the experts do it

Four financial advisers tell JEFF BUCKSTEIN about their own retirement strategies.

Hot on the heels of a torrid 2004 in which the Toronto Stock Exchange composite index outperformed all other major North American exchanges, another RRSP season has kicked into full gear.

If last year is any indication, however, investors may be left shaking their heads wondering what to do. After the TSX turned the corner in spectacular fashion in 2003 following two years of declines, RRSP contributions still only inched ahead marginally in 2004. Perhaps there was, and still is, a residual feeling of nervousness following the high-tech bust earlier this decade.

So what do you, as an RRSP investor, want to do in 2005? Should you have enough confidence in the market to take the plunge and invest in equities? Or are there other long or short-term options that are best suited to your age, risk tolerance and overall financial position?

Perhaps before making any decisions, you might want to look at how four Canadian financial advisers are handling their own RRSP portfolios this year. (They emphasize that the decisions they've made reflect their own personal circumstances and are not necessarily consistent with advice they might provide to specific clients.)

Dave Christianson

Financial planner and investment counsel, Wellington West Total Wealth Management Inc., Winnipeg.
Age: 48

Portfolio breakdown: Mr. Christianson, a fee-only financial planner, has traditionally included a balance of about 93 per cent managed equities in his RRSP portfolio, with the remaining 7 per cent invested in the bond portion of balanced funds. He likes to focus on Canadian blue-chip equities involving sectors such as financial services (i.e. stocks from the Big Five banks) and natural resources (such as Enbridge Inc. and EnCana Corp.) This year, he's also focusing on using pooled funds, such as the Diversified Private Trust from Integra Capital Ltd., and a multi-manager hedge fund from Portus Asset Management Inc. (BancNote Trust Series X.) Target rate of return: Mr. Christianson's targeted rate of return for 2005 is 10 per cent, which is consistent with expectations from past years.

With a portfolio that has been virtually all equities, however, his annual return has sometimes been spectacular - with rates in excess of 20 per cent. The flip side, though, has been occasional very low or negative returns, albeit never worse than minus three per cent.

Forecast: Mr. Christianson generally tries to avoid making any predictions about how specific indexes or industrial sectors will perform. However, he's concerned about the potential effect of a number of factors - including a high Canadian dollar, the U.S. trade deficit, war in Iraq, high oil prices and the threat of terrorism - on both domestic and international markets.

Basic strategy: Ironically, as busy as Mr. Christianson has been handling clients' RRSP portfolios over the years, he's never been a hands-on investor with his own portfolio, which was established in his late 20s.

"It's a haphazard group of mutual funds that I've accumulated, sometimes by default, and now I've got too high a concentration in equities for my advancing age," admits Mr. Christianson, who has used the services of a sounding board adviser to assist with the portfolio, but now plans to take a more active approach in managing his RRSP.

In 2005, "I'm making a major overhaul to my portfolio, but that has nothing to do with the markets. It has to do with my age and also the fact that I feel its time to get a little more strategic with my own money." He now plans to reassess his portfolio on an annual basis.

Mr. Christianson describes himself as an "aggressive, buy-and-hold investor," who could, in the past, afford to take risks because of a long investment horizon.

But with a substantially reduced period until his expected retirement in about 10 years, he intends to reduce his RRSP equity holdings to about 80 per cent this year from 93 per cent, with bonds replacing most of the equities. He plans to further reduce his equity proportion over the next decade.

Despite having kept a hands-off approach in the past, Mr. Christianson is pleased with the financial performance of his portfolio because "the managers I've picked have done a good job on balance, and the rate of return has been great."

And, while not advocating inattentiveness to one's portfolio, perhaps there is a lesson to be gleaned from his personal experience, he muses. Rather than fall for media hype - for example, he didn't get caught up in over-weighting of tech stocks during the boom of the late 1990s and subsequent crash - "[I just] picked good quality stuff and stuck with it. For me, that didn't turn out to be a bad approach, even with a 21/2-year bear market."

Ron Harvey

Vice-president, Money Concepts, Ottawa
Age: 52

Portfolio breakdown: About 90 per cent of Mr. Harvey's RRSP portfolio consists of mutual fund equities, supplemented by balanced funds. Examples of domestic mutual funds he is holding include Trimark Select Canadian Growth and Fidelity True North. International funds include Trimark Select Growth and the AGF European Equity Fund.

"I'm mostly an equity investor because, in my mind, equities will outperform other investments over time," says Mr. Harvey, who can't foresee equities ever being reduced to less than 70 per cent of his total portfolio.

Although Mr. Harvey doesn't plan to make any major changes to his RRSP portfolio in 2005, he does want to place a little more emphasis on value-based, rather than growth-based, mutual fund equities.

Target rate of return: Mr. Harvey expects about an 8-per-cent return on his RRSP portfolio in 2005, a figure that falls within his average annual target range of 8 or 9 per cent. This, he says, is a sustainable rate of return, given the historical performance of equities over the past 50 years.

Forecast: Mr. Harvey believes the Canadian market will "continue to grow at a reasonable rate" this year, albeit at a somewhat reduced clip from the gains posted in 2004. He doesn't see anything on the domestic horizon to signal a major pullback.

Internationally, he's worried about the U.S. budget deficit, but predicts that if a concerted effort is made to reduce that gap, as many analysts predict, business confidence will soar and the U.S. market "will do reasonably well."

Mr. Harvey also believes that European stocks will rebound from poor performances over the past couple of years and offer "lots of great opportunities."

Basic strategy: Mr. Harvey describes his investment style as "moderately conservative." He tends to employ a buy-and-hold strategy and is willing to accept occasional downturns to achieve a consistent growth rate over time.

"I don't like to jump out of sector A to go to sector B - having done this in the past and failed," he says. "As a result, I only deal with the major fund companies, such as the Mackenzies, Trimarks and Fidelitys. They've got enough of a blend from within to satisfy my long-term needs."

Mr. Harvey, who favours mutual funds over individual equities for his RRSP portfolio, always tries to ensure he stays fully invested vis--vis the foreign allowable holdings, which currently stands at 30 per cent. In fact, his total foreign holdings are actually closer to 40 per cent this year, because certain of his Canadian mutual funds contain foreign holdings.

In order to maintain a consistent performance within his portfolio, Mr. Harvey favours a strategy of value investing using a combination of conservative equities and balanced funds (such as the Trimark Select Balance Fund) that, in addition to equities, contain fixed-income securities.

"You're not going to hit home runs in cycles where value investing is out of favour, but if you stick to that discipline, you're going to take out some of the peaks and - most importantly - the valleys."

Mr. Harvey, who reviews his RRSP portfolio strategy annually, practices dollar-cost averaging, whereby he puts a certain amount into his RRSP throughout the year. "The biggest advantage of that is there's no crisis for finding a slew of money at the end of the year. That's how people pay for their mortgages and it's important to just do the same thing with investing."

Ivan Chang

Financial planner, Scotia McLeod, Richmond, B.C.
Age: 43

Portfolio breakdown: Mr. Chang's RRSP portfolio consists entirely of equities.

The domestic equities within his portfolio, which are guided and monitored by his employer, Scotia McLeod, generally consist of individual dividend and income trust stocks. On the domestic side, Mr. Chang currently holds about 15 "good core individual stocks" covering such sectors as financial services, utilities and retail. Internationally, he opts for value-oriented mutual funds.

Mr. Chang believes dividend stocks represent a prudent investment vehicle in the present low-interest-rate climate because they offer a combination of dividends and growth. The income trust adds extra balance to the mix because it provides an income flow, he says.

Target rate of return: Mr. Chang's targeted rate of return for 2005 is 8 to 10 per cent. That's within the range he's always aimed for and often managed to exceed.

Forecast: Mr. Chang believes the Canadian market will continue to be strong, featuring slow, if not particularly bullish, growth. He points out that natural resource equities - particularly those involving oil and metals - are doing especially well.

He believes the U.S. faces problems, such as a declining dollar and slow corporate growth, that will adversely affect its overall stock performance in 2005. As a result, Mr. Chang currently has a higher proportion of Canadian investments in his portfolio than he might otherwise carry - approximately 80 per cent, well above the minimum required 70 per cent.

Basic strategy: Mr. Chang views his RRSP investment portfolio as part of an overall personal financial plan that takes into account both his tax planning and insurance needs.

"That way, I can evaluate what my long-term objectives are and get a more specific idea of what my asset allocation should be."

When selecting stocks, he looks for a long-term track record of consistency of between five and 10 years, along with a "fairly stable" management style. While he feels the management expense ratio (MER) paid for fund turnover is important, it's not a major factor in determining what to put in his portfolio. In fact, "I'd rather buy something with a higher MER if it consistently outperforms the market."

Although he exclusively holds equities and claims a medium-to-high risk tolerance, Mr. Chang describes his basic investment style as "conservative." He utilizes a "very systematic process" of selecting stocks to accommodate what is generally a buy-and-hold strategy. Nevertheless, Mr. Chang is not averse to making changes should certain economic and other circumstances arise.

Generally speaking, Mr. Chang prefers holding equities with greater turnover potential outside of his RRSP, to take advantage of possible tax strategies for capital gains. He also likes to retain emergency cash outside of the RRSP so he can react in case of market uncertainties.

One of the lessons he's learned over the years is to maintain consistency by sticking with a long-term investment plan.

"If you're just chasing the hottest thing on the market or last year's performers, you're getting off track. Even in the best markets, there are a lot of challenges and uncertainties in the investment world, and that can be overwhelming.

"But with a strategy in place, I think you can overcome that. It's basically just slow, steady performance - like with the tortoise and the hare."

John Kenny

Vice-president, Canaccord Capital Corp., Calgary
Age: 44

Portfolio breakdown: Mr. Kenny is weighting his 2005 RRSP portfolio as follows: approximately 25 per cent in high-grade corporate and provincial bonds, with laddered maturities from six months to three years; 25 per cent in cash and near-cash reserves such as T-bills; 35 per cent in common stock of individual equities, and 15 per cent in equity trusts.

Equity trusts held include Wellco Energy Services Trust and Baytex Energy Trust, both of which are affiliated with the oil-and-gas industry.

With individual equities, Mr. Kenny is also especially bullish on the energy sector and is holding oil stocks such as Petro-Canada, Fairborne Energy Ltd., and Thunder Energy Inc. along with resource stocks such as Bema Gold Corp. and Kinross Gold Corp.

Target rate of return: Mr. Kenny is looking for a return of about 10 per cent on his RRSP portfolio this year - a figure he views as being both conservative and at the minimum end of his expectations. "Ideally, I'd like to achieve annual returns of better than 15 per cent, but my long-term goal is to consistently deliver between say 10 per cent and 15 per cent."

Forecast: Mr. Kenny believes 2005 will be a "tricky year," with gains of possibly as much as 12 per cent in the broad market during the first four or five months, followed by a potential decline.

"I think we're going to see most of the gains in the market made in the first half. The second half of 2005, through perhaps mid-2006, is very clouded. This is really a year where it's about selecting stocks in the right sectors, realizing gains earlier in the year and then having the discipline to sit on the sidelines when need be."

Mr. Kenny also anticipates there will be Canadian interest rate stability, which will help to preserve capital by, for example, maintaining approximately the same yield on bonds throughout 2005.

Basic strategy: Mr. Kenny describes his investment style as that of a "risk taker," willing to adapt to changing market conditions to recognize great buys. For example, although he often practises dollar-cost averaging, he will sometimes jump in and purchase more of a particular stock all at once in anticipation of a rapidly ascending value.

In the present environment, he is also exclusively invested in Canadian equities, ignoring the 30-per-cent allowable foreign content limit - a limit he has taken advantage of during previous years. "I don't exclude U.S. or any other stocks from my portfolio for any other reasons. It's just that I [currently] see more opportunity here."

Mr. Kenny, who reviews his RRSP strategy quarterly, also prefers investing in individual equities as opposed to mutual funds, particularly in the present climate. "This is going to be a market of picking stocks in the right sectors and then being able to have the liquidity to exit that market when need be. Mutual funds don't lend themselves to that sort of strategy."

He also doesn't subscribe to a hard-and-fast rule of always putting capital gains-related investment vehicles outside of his RRSP simply to realize a tax advantage, particularly if the potential opportunity cost involves forsaking a larger gain within the portfolio.

Special to The Globe and Mail

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