Here's how to cut investment risk in scary 2008

Here's how to cut investment risk in scary 2008 TheStar.com - columnists - Here's how to cut investment risk in scary 2008

January 02, 2008

Ellen Roseman

In a recent column, I said the ongoing credit crisis will keep generating nasty news into 2008. And I said investors should cut their risk and protect their capital.

"How do I proceed?" asked one reader. "I'm a very small fry investor with (as you would guess) mutual funds that are heavily weighted in equities."

So, here's my advice on how to reduce the risk of your investments.

Make sure you have a balanced portfolio.

When investing for the long term, you will face many gut-wrenching times when the stock markets are choppy and heading down.

You may find it hard to sit tight during a slump that lasts a year or two. Many people panic and sell as they see prices going lower and lower.

With a balanced portfolio, you can weather the storms more easily. This means keeping 20 to 50 per cent (or more, depending on age and stage of life) of your money in investments, such as bonds, that don't tend to go down when stocks go down.

Open a high-interest savings account. If you check the interest tables in Monday's business section or on thestar.com, you'll find more than a dozen banks offering 3.75 per cent or more on short-term savings accounts.

You're not taking a risk by going outside the Big Five banks, because your deposits are protected for up to $100,000 per account by the Canada Deposit Insurance Corp. For information, go to www.cdic.ca on the Internet.

Put some money into bonds or fixed-income mutual funds.

When you hold bonds directly, your capital will be returned to you if you hang on until maturity (as long as the bond issuer doesn't go bankrupt). You will need a stockbroker or online brokerage account to invest in bonds on your own.

Bond funds can also be good choices. But make sure the management expense ratios, or MERs, are reasonable, because they cut into your returns.

At thestar.com, you can search for mutual funds with low MERs. I'd suggest looking at Canadian fixed-income funds that charge 1.5 per cent or less. Good choices include PH&N Bond and Beutel Goodman Income among actively managed funds; RBC Canadian Bond Index and TD Canadian Bond Index among passively managed funds; and iShares Canadian Bond Index Fund, which trades on the Toronto Stock Exchange (symbol XBB).

Take a look at dividend income funds.

The managers invest in high-yield common and preferred shares and income trusts: generally, mature companies with generous payouts. The stock prices don't fall too far unless the market thinks the dividend may be cut.

The Big Five banks offer monthly income funds with excellent safety records. You won't go wrong with any of them.

Read a good book on investing.

Gordon Pape, a prolific Canadian financial author, tells people how to hold a panic-proof portfolio in a book coming out this month, Sleep-Easy Investing (Viking Canada).

He says low-risk investors should avoid common stocks, income trusts, most exchange-traded funds (except bond ETFs) and precious metals mutual funds.

Gail Bebee of Toronto is a self-taught investor, who has learned by trial and error to manage her own portfolio.

Procrastination is the enemy of successful investing, she says in her new self-published book, No Hype: The Straight Goods on Investing Your Money (sold online at www.nohypeinvesting.com).

So, make a resolution to start rebalancing if you're too heavily invested in stocks or equity funds. Your future security depends on it.

---

Ellen Roseman's column appears Wednesday, Saturday and Sunday. You can reach her by writing care of Business, the Toronto Star, 1 Yonge St., Toronto M5E 1E6;