Clarke Financial Management

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Portfolio Management A financial plan is a living document. It needs to reviewed regularly and amended when necessary. However, a plan is worthless unless you act upon it. For you to achieve your financial goals the strategies outlined in your plan must be implemented and regularly monitored. It is my personal belief that you should not consider anything in isolation when reviewing your financial holdings. All parts of a puzzle are required to see the full picture and nothing is more important in making appropriate financial recommendations than considering the entire financial landscape. It goes without saying that diversification between asset classes is critical. In addition, a well-allocated portfolio should be diversified across industry sectors and geographic regions. However, investment style diversification is also an important risk management tool you can use. The conventional approach to defining asset classes is to break them down generally into fixed-income securities and equities, and then refine the breakdown into: 1 Cash and cash equivalents: cash and short-term debt securities that are highly liquid and marketable, such as Treasury Bills, Certificates of Deposit, or money market mutual funds. 2 Bonds: Government or corporate fixed-income securities or investment funds specializing in fixed-income securities. These securities provide periodic income for spending or reinvestment, some capital preservation and, depending on the term and issuer, liquidity. Foreign-currency-denominated bonds provide exchange rate exposure. 3 Domestic and International Stocks : common or preferred shares or investment funds specializing in equities to provide capital appreciation and some dividend income. International stocks provide foreign currency risk exposure and portfolio risk reduction. 4 Other (gold, real estate, venture capital and derivatives): these products offer capital gains, a hedge against inflation, market risk diversification and portfolio risk reduction. Assembling a portfolio of several different types of securities is a well-known way of reducing risk without sacrificing return. In general, the greater the number of securities in the portfolio, the lower the risk, because each security ’s returns will rise and fall at different times and at different rates. However, proper, effective diversification cannot be achieved by simply diversifying in the same market. Spreading investments across more than one asset class and country and over more than one business helps maintain performance, eliminate losses and make returns more certain. While it is wise to diversify among different companies in any market, it is necessary to further diversify among different geographic markets to achieve the greatest balance between risk and return. Studies have shown investing in global markets significantly reduces risk while enhancing return. Some global exposure can be achieved by investing in Canadian domiciled companies with international operations, but still greater diversification can be achieved by investing in securities offered on exchanges outside of Canada.

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