Start reducing exposure in your portfolio

BY FAZAAD BACCHUS

In 2008 the stock market had one of the most drastic falls wiping out the savings of many. Those who stayed in the market were able to recover somewhat, but those who couldn’t stomach the possibility of further losses cashed out and of course counted their losses. In Biblical stories we are often told of seven years of good fortune and seven years of famine.

In the financial industry this story is also know only too well. It’s referred to as the seven year cycle, where the markets are generally up and then comes the fall or recession. Counting seven years from 2009 takes us to 2016 where the idea that a recession was coming has been on every one’s minds.

We in the financial arena have been watching for signs since 2016 but couldn’t see any. All the fundamentals were still intact; unemployment was low, housing starts high, purchasing managers’ index was above fifty, and most important of all, the yield curve was still positive. So even though there has been a watch party on the markets since 2016, the markets continued to do well. The recession became overdue and frankly speaking the recession is now overdue.

Trade wars, Feds cuts and tweets are not the causes for a recession, those create volatility and on many an occasion, buying opportunities for the smart investment manager. It is the fundamentals that tell us what to look for and the fundamentals are starting to show signs. These signs do not determine but indicate that we need to watch out and start re-adjusting our portfolios.

As an example, if you are driving on the roads in Canada and suddenly you see storm clouds in the distance, what do you do? For some it might be best to get off the road and for others the least you should do is adjust your driving to suit. According to many analysts, we are approaching dark clouds in the industry and it might be time to adjust your driving.

How do you do this? Well the first thing you should do is consult with your financial advisor; conduct an analysis on how much risk your portfolio is taking on and whether or how to reduce it. The lesser equity you have, the lesser your portfolio will be affected. The lesser your portfolio is concentrated the better your portfolio will be, or put another way, the more diversified your portfolio is the better your chance of weathering the storm.

A model portfolio mix should now consist of 50% fixed income, 20% US equity, 15% Canadian equity and 15% Global equity. This model will reduce your exposure to equities and thus reduce your overall risk. On the same hand one size does not fits all, if you are a senior and most of what you have is invested, then you might want to further increase your fixed income to anywhere between 60% to 80%.

No one knows for sure if the recession will come, or when it will come, even though the signs are pointing to it. However, like my grandmother used to say “if you see dark clouds, walk with an umbrella”, so too, you need to talk to a qualified financial advisor who will help you protect your investments.