Hoping for a rebound - Uncertainty clouds investment returns

www.canada.com John Valorzi The Canadian Press Sunday, January 12, 2003

A lessening of international tensions in hot spots such as Iraq, North Korea and Venezuela, where a widespread strike has crippled the country's oil industry, could help lift markets this year, analysts say.

After one of the most volatile periods in memory for the stock market, the average investor is nervously hoping that 2003 will bring a long-awaited rally in equities.

With the U.S. economy looking poised for recovery, the stock market could end a three-year losing streak that has squeezed investors portfolios and left many average consumers disdainful of buying stocks.

A lessening of international tensions in Iraq, Venezuela and North Korea could also spark a market recovery. And there's also a chance investors may forget the lessons of the current bear market and get tempted again by hot stocks that could create another bubble to burst.

That's why keeping investor expectations in check is right up near the top of any list of financial resolutions for the New Year, advisers say.

The usual things such as making sure you diversify your holdings, invest in RRSPs, think ahead for tax planning and keep debts manageable should be on that list as well. But for such volatile times, investors must accept the fact 15 to 20 per cent annual returns on their portfolios are a thing of the past, so they should be thinking long-term, not month by month or day by day.

"With everything that's happened over the past three years, it sort of drives home the point that if you're investing, your best strategy is always to have a diversified portfolio and stick with it for the long haul," says Marc Levesque, senior economist at TD Bank.

"Don't try to time the markets and play games in hopes of making a quick buck. Investing is a long-term proposition, and there's a lot of uncertainty out there now as to where the markets are going over the next year.

"My advice to people would be to just sit there, stand pat. The markets will recover one day."

Model portfolios should include about half of the money in stocks, a third in bonds and the rest in cash or short-term liquid investments. Those percentages can then be adjusted depending on how one particular sector is doing against the other.

Bea Hale, a certified financial planner with the Berkshire Investment Group in Whitby, Ont., says she reminds clients to review their portfolios to ensure they are appropriately diversified and not just in one market sector or one type of investment.

"Quite often, a lot of the clients are in something that is a little too risky. Not diversified overall, but diversified in one sector," she says. "It causes a problem when that sector goes down."

Richard Yasinski, president of Financially Sound in Stittsville, Ont., near Ottawa, says he'll be advising his clients in the new year to weigh the pros and cons of being long-term equity investors.

Although Yasinski also advocates a balanced approach to investing, he has long held that stocks should play a significant part of most portfolios, particularly for investors looking ahead 10 years or more.

But given the length of the stock market downturn and the volatility that investors can expect ahead, Yasinski says he understands why people may be having their doubts about equities.

"My clients have been investing for five years or more and not seeing a lot of growth," Yasinski says. "I guess my comment to clients is: 'Are you willing to stick it out.' "

Conditions are very different now compared with the 1990s and "clients are going to have set their expectations" and decide whether they really believe equities will outperform bonds or cash or other investments, he says.

Yasinski is among those who is wary about income funds, believing there has been so much recent interest in them that there is a "mini bubble" that's bound to burst at some point.

Income funds pay out a large portion of the cash flow generated from the underlying business each month or quarter, making them somewhat similar to an interest-bearing or dividend-paying investment.

However, income trust units are a form of equity, akin to common shares, that provide investors with less protection than do bonds or preferred shares, which have a higher claim on the business's assets in the event of insolvency.

Investors may also face special tax opportunities, or challenges, since the trusts' distributions may be treated as interest, dividend, capital gains or a combination of all three.

Yasinski says he believes the biggest opportunity for investors is in "standard common shares of viable businesses that have just been beaten up the last couple of years because of the market."

"Don't give up yet, especially if you have five or more years before you ever need the money."