Don't get caught by surprise
While no one can predict when upheavals may occur, there are steps we can take to protect our wealth.
By Karen Simpson, Head of Private Banking
Royal Bank of Canada (Suisse), Geneva
Markets have been more than a little volatile of late. There have been a number of crises and conflicts over the past 12 months: terrorist attacks, tensions in the Middle East, accounting scandals, and audit failures. Investor confidence has been shaken by these events, and markets experienced considerable selling pressures.
Sadly, while economic and political problems seem to be an inevitable part of the landscape, there are steps you can take to minimise the effects on your assets.
1. Develop a sound financial plan
The umbrella strategy for crisis protection — and for achieving your financial goals — is the development of a financial plan.
The financial planning process involves defining your goals (wealth accumulation and wealth preservation, for instance), identifying potential roadblocks to success, and then developing strategies to ensure that you achieve your objectives. All planning strategies, including those described below, should flow from your comprehensive plan.
Planning can take on even greater importance when more than one jurisdiction is involved, as the laws that apply to assets held abroad may be different than the domestic laws you’re accustomed to.
2. Extend diversification
By spreading your investment risk across different asset classes, currencies, industry sectors, and geographic locations, you lower the overall risk in your portfolio.
To further enhance your risk management during times of crisis, you can also diversify by holding investments across a variety of economic sectors, as unexpected events can often have a greater impact on one sector than on another. The oil sector at times of crisis in the Middle East is an obvious case in point.
Holding non-correlated assets is another way to shield your portfolio from unexpected events. For instance, if the majority of your investments are denominated in U.S. dollars, consider holding assets that are traditionally not correlated with the U.S. dollar.
Alternative investments, including hedge funds, can also potentially play an important role in your plan as part of a diversification strategy, as they are designed to provide consistent returns regardless of market conditions.
3. Location, location, location
In times of crisis, where you hold your assets may be as important as what you hold.
In past crises, governments in some countries have imposed taxes, expropriated private businesses, changed the rights of foreign investors, and imposed currency controls that make it impossible to move money out of the country.
You can manage your jurisdiction risk by choosing a country with a history of political stability, an adherence to the rule of law, and a strong banking or investment management tradition.
You should also choose your financial partners — brokers, asset managers, bankers, trustees, custodians, lawyers, and tax advisors — with the same degree of care.
Wealth management can be a complex undertaking, especially when businesses are involved, or financial issues cross many jurisdictions. If you rely on an inexperienced financial partner, or on one who fails to perform proper due diligence on a transaction, you could suffer missed opportunities, financial losses, or both.
4. Avoid short-term speculation
In hindsight, many crises seem to offer an opportunity to make a quick profit. As prices plunge, you buy low and sell when the markets recover. But there are simply too many variables to predict the impact on markets with any certainty.
While a “quick flip” or “quick turn” strategy is fine for savings you can afford to lose, the gamble is too great for assets you have earmarked for your long-term financial security.
In times of crisis, it’s best to maintain your long-term focus and seek out quality assets and investments with the potential for appreciation over a number of years.
5. Be disciplined
Market volatility often tests our patience. In difficult market environments, maintaining a disciplined focus can be key to keeping your financial plan on track.
A regular investment program imposes discipline on your savings strategies. By investing regularly, you minimise the impact of short-term volatility on your portfolio. Known as “dollar-cost averaging,” this strategy can iron out price fluctuations in world markets over time and ensure that your savings goals remain a priority.
Rebalancing involves bringing your asset allocation back in line with your original targets. For instance, chances are that the fixed-income portion of your portfolio has outperformed the equity portion over the past few years. If your fixed-income holdings now account for a greater weighting in your portfolio, consider selling some of these holdings at a profit and reinvesting the proceeds in more attractively priced, high-quality equity investments.
Creating a sound financial plan, and then seeing it through with disciplined strategies, can help shield your portfolio from bouts of market volatility.
GPB art competition celebrates the undiscovered
Art is an acknowledged passion for many of our clients, and with fine art adorning each issue of Global MoneyGuide, it’s a passion we obviously share.
In recent years, we’ve sponsored the New Canadian Painting Competition, which recognises and supports the talent of emerging Canadian artists. The 2002 competition attracted more than 1,000 entries.
“The competition is a wonderful opportunity to discover Canada’s up-and-coming artists while providing support and exposure for their art,” said Michael Lagopoulos, President and Chief Executive of Global Private Banking.
Indeed, many of those recognised in the competition sign on with prestigious Canadian galleries and sell their work internationally. The three winners will be featured in the winter issue of Canadian Art magazine.
Managing your wealth
How much of a demand is there for golf memorabilia?
The golf memorabilia market has exploded over the past decade. Like all collectibles, golfing items that are the oldest, the scarcest, the most historically significant, and in the best condition have the greatest value.
At one auction, a 150-year-old Scottish “feathery” golf ball sold for a world-record sum of US$11,550. Sotheby’s estimates a circa-1759 woodenhead golf club at between US$110,000 and US$140,000. However, the majority of golf memorabilia transactions take place in lower price ranges.
"Most golf collectors seek unusual and patented designs,” says Pete Georgiady, industry expert and author of Collecting Antique Golf Clubs. “Many odd-shaped clubs, for example, were subsequently deemed illegal and have that additional notoriety to accompany their visual appeal.”
Autographs on memorabilia are also popular and range in value. Autographs from American golf stars of the 1950s and 1960s and from stars who rarely give out autographs, such as Tiger Woods, are most in demand.
Watch out for fakes though. Some estimates suggest that as much as 70% of items sold in the industry are fakes, particularly in the autograph market. Collectors suggest buying only through dealers who belong to either the Universal Autograph Collectors Club or the Professional Autograph Dealers Association.
Like any other kind of collecting, it’s crucial to do your research. Two general reference guides are Golf Antiques and Other Treasures of the Game, by John M. Olman & Morton W. Olman, and Antique Golf Collectibles: A Price and Reference Guide, by Chuck Furjanic.
Three sectors that hold promise
Consumer staples shine
By Paul Johnson, Senior Portfolio Manager, and
Christine Poole, Vice-President and Portfolio Manager,
RBC Global Investment Management Inc.
During a period of market volatility and growing conflict on the world stage, consumer staples continue to perform well.
While the MSCI World Index was down 26.9% for the year to date ending September 30, the Consumer Staples Index was down only 5.6% (figures in Canadian dollars). The companies in the sector, which include large household products firms like Procter & Gamble, and food manufacturers like Cadbury Schweppes, remain attractively valued compared with their historical valuations.
These companies typically offer solid earnings growth of 10% to 15% even in volatile markets. Unlike other industries, they have not suffered from accounting irregularities, making them attractive to investors still reeling from the effects of WorldCom and Enron.
This sector also stands to benefit from the uncertain political climate. In the case of an international conflict, investors are likely to be attracted by the dependable earnings of consumer staples companies. Furthermore, consumers tend to drink, eat, and smoke more during times of stress or depression, which can help the bottom line of many of these firms.
Longer-term, as the global economy recovers, investors will move out of this sector into more aggressive sectors offering greater growth potential.
Industrials wait their turn
By Paul Johnson, Senior Portfolio Manager, and
Christine Poole, Vice-President and Portfolio Manager
RBC Global Investment Management Inc.
With the recovery of the global economy in the second half of 2002 proving to be weaker than expected, the outlook for earnings growth in the industrial sector continues to be muted at best.
Over the past quarter ending September 30, the sector was down 17%, which was slightly worse than the MSCI World Index (down 15% — figures in Canadian dollars). The U.S. defence industry continues to be a bright spot because of expected increases in defence spending over the next five years.
Consumer-related markets, such as housing and automobiles, have done well, but consumer confidence will determine this area’s future performance. In the past couple of months, employment figures and consumer confidence figures have shown signs of weakening.
Valuations of industrial conglomerates have declined dramatically over the past year because of concerns over earnings transparency and complex accounting. These concerns should diminish over time and stock prices should once again be based on underlying business fundamentals.
An international conflict would hurt the sector in the short term because of the economic disruption it would bring, but if the conflict was brief, the markets could end up rallying.
Looking long-term, if there is a stronger than expected global recovery, any pickup in capital spending will quickly translate into new orders because of extremely low business inventories.
Brightness in banking
By Vincent Fernandez, Vice-President and Portfolio Manager, Equities
RBC Global Investment Management Inc.
Although the financial services sector was down about 24% from the beginning of the year until the end of September, the banking sub-sector did relatively better, posting a 15% decline over the same period.
Weakness in the world’s capital markets continues to hamper the diversified financial companies. Banks, by focusing on taking deposits and lending money, have done fairly well. In fact, equity market volatility has led to an increase in deposits as investors seek security. They’ve also benefited from the strong housing market in North America and Europe, which has generated a lot of mortgage activity.
Weakness in mergers and acquisitions and IPO markets continues to hamper investment banking. Credit card companies have been hit by concerns over extension of credit to higher-risk individuals, but their stocks remain attractively priced.
The insurance subsector has underperformed, declining about 36% from January 1 to the end of September. Life insurance companies have had earnings squeezed, as equity markets declined, but are currently reducing exposure and shoring up reserves to deal with the issue.
The outlook for property casualty insurance is more positive over the long term. Companies continue to increase premiums, while reducing their exposure to risk.
If the global economy grows by 1.0% to 1.5% next year, investors could see returns in the high single digits with a large portion coming from dividends. The outlook is for interest rates to climb slightly, improving margins for banks because the spread between the interest given on deposits and the interest received on mortgages would increase.
For further information, please refer to Global Investment View, which includes an analysis of the stock, bond, and currency markets. This publication is available from your relationship manager, or by filling out our online contact form.
Old-fashioned fraud is on the increase
Identity theft has been a major issue in the United States for several years, but only recently has it come to prominence in other parts of the world. Known as “bin raiding” in the United Kingdom and “dumpster diving” in North America, this activity involves obtaining personal financial information from dustbins and refuse sites in order to commit trans-action and identity fraud.
Those who commit identity theft are interested in personal information such as names, addresses, account numbers, and credit card details. Bank statements, credit card receipts, utility bills, and government documents all contain data that can potentially be used by criminals.
Using the financial documents we throw away or recycle, a person can assume your identity and use it to get access to your financial records, open new bank accounts, transfer bank balances, apply for loans, credit cards, and other services, as well as purchase big-ticket items.
Identity theft is usually a crime of opportunity, with the fraudster looking for the easiest target. This makes the crime highly preventable. Maintaining standards for protecting personal information is the best defence.
The most effective means of prevention is taking care in the disposal of financial documents. For example, shredding or tearing up financial statements or credit card receipts before you recycle them will make it virtually impossible for anyone to assemble all the necessary pieces of information needed to commit fraud.
Here are a few other steps you can take to avoid becoming a victim of transaction fraud or identity theft:
- Carefully check your receipts against your credit card and bank statements, and report any unfamiliar transactions to your card issuer or bank immediately.
- Never give out personal or financial details to anyone on the phone or in person, even if they claim to be from your bank or the police.
- Use different passwords for different accounts.
- If you’re moving, redirect mail from the day you
move so that important personal information will be forward-ed
to your new address without delay.
- Never keep a written record of your passwords in your wallet.
Thanks for the feedback
We would like to thank the many readers who responded to our recent Global MoneyGuide Readership Survey.
As we enter our seventh year of publication, we have covered many wealth management issues, with many more still to come. Your opinions on the content and direction of this newsletter are more important than ever. Some of your suggestions will be covered in future issues, while others, such as the article on golf memorabilia, have been included in this issue.
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