Helping your clients build portfolios that allow them to sleep at night is critical to assisting them in achieving their investment objectives.

Whether your clients are conservative, moderately aggressive or aggressive investors, your goal is to work with them to “achieve the highest level of return for a given level of risk,” says Stephen Lingard, director of research, multi-asset strategies, and portfolio manager with Franklin Templeton Investments Corp. in Toronto.

The level of risk that is appropriate for your clients is not only based on their individual risk profile but also on their time horizon for getting to where they want to go.

In general, Lingard says, “the longer their time horizon, the more volatility they should be able to tolerate because they have more time to make up any losses.”

Your role is to balance the risks in an intelligent and prudent way to help your clients avoid outliving their savings, accommodate withdrawals and meet their lifestyle requirements, says Kevin Sullivan, chartered strategic wealth planner and vice president and portfolio manager with in Toronto with Montreal-based MacDougall MacDougall & MacTier Inc.

Adds Brian Smith, vice president and portfolio manager with Fit Private Investment Counsel Inc. in Toronto: “You must be able to combine various asset classes with distinct, measurable risk/return characteristics in the right proportions in [client] portfolios.”

Smith recommends that clients have exposure not only to the primary asset classes but also to subcategories within each asset class.

For example, in the fixed-income space, your clients should consider investing in not only traditional government bonds but also in high-yield, corporate, convertible and emerging-market bonds and preferred shares.

When it comes to equities, Smith suggests, clients’ portfolios should hold investments in Canadian, U.S., global and emerging-market equities, as well as other asset classes such as real estate, precious metals and commodities.

A well-diversified portfolio, he adds, is the most important factor in ensuring that clients’ performance expectations are met while minimizing investment risk. The asset classes you and your clients choose should not be correlated, Smith points out. Rather, correlations should be stable over time.

All asset classes

To select the most appropriate investments, Lingard says, you must have an outlook for all asset classes. This involves a review of past returns in combination with an outlook for each sector. The degree of exposure clients have to any specific sector, he says, should be determined by the outlook for that sector.

Lingard typically takes a seven- to 10-year view of the market when making strategic asset-allocation decisions. He also uses tactical strategies to take advantage of short-term opportunities in the market – a strategy that is worthwhile considering for clients who are long-term investors.

(While strategic asset allocation represents the original selection of a client’s long-term asset mix, tactical asset allocation takes advantage of short-term market conditions to enhance returns. Normally, the portfolio is rebalanced to its original asset mix once the objectives of tactical shifts are achieved.)

In asset-mix decisions, make allowances for the fact that each client is different and that clients have their own ideas as to what may or may not work based on their past experiences. This ultimately has a psychological influence on their tolerance and capacity for risk.

For the most conservative, risk-averse investors who typically are invested primarily in fixed-income securities, Smith suggests having “at least a small equities allocation – 10% or greater – in almost all time periods to deal with inflation risk,” with the balance of the portfolio invested in fixed-income securities and cash.

@pagebreak@”You should not overreach for yield,” he cautions, and you should not be straying completely from cash and fixed-income securities in the portfolio by overinvesting in assets such as high-paying dividend stocks.

Sullivan suggests a higher allocation to equities – 30% – for conservative investors, including higher-quality, blue-chip stocks (such as those issued by banks, utilities and railways), exchange-traded funds and infrastructure investments.

Take some risk

Sullivan contends that even very conservative investors can afford to be relatively aggressive and take some risk until about age 70; thereafter, their investments should be less aggressive.

For conservative clients, consider including investment funds in the asset mix that offer a guaranteed income, such as funds with a guaranteed minimum withdrawal benefit. “In principle, it makes sense to have some type of guaranteed return in a portfolio,” Smith says.

However, Sullivan suggests, “Conservative clients tend to gravitate toward conservative funds and, consequently, do not need a guarantee.” He also says that conservative investors tend to be fee-sensitive, a reality that runs contrary to the high fees charged by funds with guaranteed income.

For clients who are moderately aggressive – considered balanced investors – Sullivan recommends holding 40%-50% in fixed-income securities and the remainder in equities.

Smith suggests a similar allocation, with emphasis on 60% equities. For the equities portion, he advises an exposure of up to 50% non-Canadian securities, which should include an “adequate portion” – say, 10% or more – in emerging markets that have higher risk/reward characteristics over the long term.

Sullivan is not particularly worried about more aggressive investors who are comfortable with large helpings of risk. For these investors, he recommends an asset mix of 80% equities and 20% fixed-income.

Smith suggests 10%-25% in cash and the rest in equities. These adventurous clients can be a little more aggressive and hold some small- and mid-cap securities – assuming that they also have a long time horizon.

Given that clients would have varying time horizons, Lingard suggests running a range of asset-allocation scenarios, focusing on different time horizons and risk-tolerance levels.

Regardless of the client’s risk profile, Smith says, it is difficult to justify a significant equities allocation if the client’s time horizon is short – say, around five years.


Besides asset allocation, pay attention to fees and taxes, which can have a negative impact on returns. As Smith points out: “High fees erode returns.”

As for taxation, make sure that investments are made in a tax-efficient manner, he adds. For example, investments that earn interest that is taxed at the client’s highest marginal tax rate should be held in a registered account, whereas dividend-paying securities that enjoy a favourable tax rate should be held in a non-registered account.

If a client is considering using leverage to enhance his or her returns, says Sullivan, ensure that the client has the resources to absorb potential losses.

He adds that leverage may be used “in limited circumstances, but never in cases in which the risk/return trade-off is not favourable.”

This is the final instalment in a three-part series on helping your clients understand risk

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