Trail Map

This article was first published in the National Post on July 8, 2023. It is being republished with permission.

by Tom Bradley

Our chief investment officer Salman Ahmed is good at asking the hard questions. One he often grinds me on is: “Is there a good reason to deviate from our long-term asset mix?”

He’s referring to the mix in the Founders Fund, our largest fund. There needs to be a compelling reason to deviate from the fund’s target for cash, bonds and stocks. For instance, for the stock weighting to be more than 60%, valuations must be pointing to above-average returns over the next five years (we don’t make forecasts shorter than that), investor sentiment needs to be bearish (a contrarian indicator) and our portfolio managers are chomping at the bit to buy stocks.

You get the idea. Stay glued to the target mix unless there are good reasons to do otherwise.

Of course, Ahmed’s question assumes two things. One, that nobody can precisely and consistently time the market (the evidence is overwhelming), and two, that the strategic asset mix, or what we refer to as SAM, is appropriate for the fund’s objective of growth and capital preservation.

You, too, should have a SAM that fits your goals, situation and personality. Before making any moves, you need a solid base to work from. Think of it as your default position; your starting point for everything.

Determining an appropriate asset mix isn’t as exciting as picking a tech or mining stock, which can come later, but it will have a bigger impact on long-term returns. Below are some examples of where SAM proves invaluable.

Account management

SAM helps determine where the money will come from when you want to buy a stock or fund. For that tech stock, it’s the equity bucket. A guaranteed investment certificate (GIC) would be funded from your fixed-income allocation.

People who inherit money or receive a big bonus often think they should do something new with the money. In most cases, the easier answer is the best answer. You’ve already thought about what your portfolio should look like, so build on it by following your SAM.

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A place to hide

You need the most help when markets are in decline and your portfolio is taking a hit. You don’t want it to go down further, and commentators are talking about places to hide. Indeed, many people shift their portfolios into money market funds and GICs. But wait. Think about what this move to “safety” does.

Let’s assume your portfolio is funding retirement years in the future and your SAM calls for 70% in stocks. Moving into a savings vehicle puts you 70 percentage points off track, which is a huge bet. It implies you’re supremely confident about what you’re doing.

Default to your SAM when you don’t know what to do. It’s your hiding place.

Do something

SAM also helps when you feel the urgency to act. When markets are volatile, up or down, it’s likely your portfolio has drifted away from its intended mix, so you should take steps to get back on track unless you have special insight into where the markets are going, which is unlikely in emotional, turbulent times.

SAM provides the action plan. You don’t even have to think about it. Rebalance your portfolio back to target, either by trimming and adding to positions, or using regular contributions and withdrawals to make adjustments.

Remember, you’re not making a call on the market or the economy. You’re just getting back on plan and, in so doing, are buying when prices are down (not necessarily at the bottom) and ensuring you’ll go back up with at least as much in stocks as you went down with.

Getting back into the market

If you’ve already made the move to get out of the market, you’re faced with what I’ve dubbed the Hardest Decision in Investing. SAM helps here, too. It’s step one.

Before you determine when and how you’re going to invest, which is step two, you need to reaffirm that your long-term mix balances growth with your tolerance for periods of negative returns. If you’re out of the market, the previous mix was clearly too aggressive.

People get obsessed with the second step without first thinking about where they’re going. By clearly defining a target mix, you’re better able to consider the reinvestment process, and knowing how far off plan you are may be motivation enough to get started.

Think of SAM as your trail map. It’ll get you where you’re going without getting lost in the woods. You shouldn’t leave home without it.