Practical analysis for investment professionals
09 October 2023

Portfolio Confidential: Five Common Client Concerns

For the past three years, I’ve written a monthly column for Canadian MoneySaver called “Portfolio Confidential” that answers various investor questions. Some of these I receive from emails, but most come from another source: I offer readers a free 30-minute confidential Zoom chat in which I provide an independent, unbiased perspective on their financial situations with no sales pitch. In exchange, I get to use their anonymized questions in future columns.

After 30 columns, I have a pretty good snapshot of the real-world issues that are front of mind among today’s investors and their advisers. I’ll share the five most common client concerns and how I addressed them in the hope that readers will find some value.

To be sure, my answers are not definitive, so I would be delighted to hear your feedback as to how I could improve my responses.

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1. The Allure of the “Panic Sell”

“I know I shouldn’t panic right now about what is happening to my investments. I told my adviser I would invest in index funds that I would not touch for over 10 years. But isn’t this time different with the war in Ukraine causing so much uncertainty?”

Stock markets tend to go up over time. The average annual total return for the US market — the S&P 500 index — is somewhere around 8% to 10% for most rolling periods over 10 years. This is why so many investors are drawn to equity markets, but not even diversification will protect you from unpredictable and extreme volatility.

No one can time the market. So don’t try. Instead, consider the two things you do have control over. First, decide whether you want to commit to being a stock market investor for the long term — 10 years is a long time. Second, use a disciplined approach and invest the same amount of money on a regular basis, monthly, for example, so that you don’t let your emotions influence your investing behavior.

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2. Falling in Love with a Stock

“I have a portfolio of about US$1 million. Last year I bought 800 shares of Zoom for approximately US$50,000. The rest of my portfolio is down about 5%, but Zoom has zoomed and is now worth $170K, or nearly 20% of my whole stock portfolio. What should I do now?”

Founded in 2011, Zoom Video Communications, Inc., is a Silicon Valley-based firm that offers video, telephone, and online chat capabilities on a peer-to-peer, cloud-based software platform. Amid the pandemic and its ubiquitous work-from-home (WFH) arrangements, Zoom captured the zeitgeist of the COVID-19 era, and its stock soared to unprecedented heights.

Full disclosure: I love Zoom! I have been using it daily since the lockdown. But even though I love it as an amazing communications tool, along with millions of other people, this doesn’t mean it should constitute a fifth of our investment portfolios.

One of the most common mistakes investors make is falling in love with a stock and piling a disproportionate amount of money into it. “This company is changing the world!” is among the more common rationales for doing so. But the trouble is anything can happen at any time to any company, including Zoom. So, what to do?

My advice is to re-balance the position in order to maintain a sensibly diversified portfolio. Sell half right away and then half again on a pre-determined date in the near future. The goal is to pare back to the original 5% weighting in an orderly fashion so as not to be driven by emotion.

As fun as it is to have 20% in a high-flying momentum stock, all stocks eventually come back down to earth. For the sake of risk management, we have to recognize that a 20% position in any one stock is a form of speculation not investing.

Finally, if you just can’t bear to sell, move your Zoom position to a completely separate account and label it “speculative” — look at it as a stand-alone holding that could win big or lose big. This way, you will no longer be skewing the performance return or strategy of your “normal” investment portfolio.

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3. The “No Rhyme or Reason” Mutual Fund Strategy

“My portfolio has taken quite a beating since December 2021. My investment adviser — he is with Portfolio Strategies and Solutions (pseudonym) — has offered no advice over the last eight months, which I find unacceptable. Please let me know if you would be interested in giving me an unbiased perspective regarding my next moves to correct and rebalance my investments. My wife and I are in our 60s, and our objective is quite straightforward: growth for the long term so that we can draw around 4% per year, which combined with our pensions will support our lifestyle.”

Chart showing Summary of Investments and Cash Accounts

First, let me say I am appalled that you have not received any communication from your adviser in the last eight months, particularly amid the steepest drop in market values in the last 50 years! This is obviously unacceptable. Second, I find it quite ironic that a firm called Portfolio Strategies and Solutions would continue to associate with an adviser who clearly hasn’t offered you any type of portfolio strategy.

Why do I say this? As you explained, your investment objective is quite straightforward, yet your portfolio holdings are unnecessarily complicated. There are too many different mutual funds and too much variation in the percentage weightings for each fund. I can’t think of a reason for this other than your adviser having a self-serving interest in selling a bunch of funds with higher management expense ratios (MERs) so that he can earn as much as possible on top of his fee-for-service.

For confidentiality reasons, I cropped the adviser’s name from the statement excerpted above. When I googled his name, I found his main qualifications are a high school diploma and a mutual funds sales license. Sadly, the lack of a CFA charter or other appropriate education is still all too common in our industry.

My best advice at this point would be to speak with your tax adviser and put together a plan to transition out of mutual funds and into either three low-cost exchange-traded funds (ETFs) that offer exposure to world markets or a well-diversified portfolio of individual equities selected by a professional money manager with proper qualifications.

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4. The Sustainable Investor

“I am a long-time ‘do-it-yourself’ investor, and I’m now considering environmental and/or social corporate practices when I think about what type of companies to invest in, and I am also really excited by the potential of generative AI in doing research. Is there some sort of ratings guide that you can recommend? Would ChatGPT be useful?”

I was once in an airport and saw something called a “fit brownie.” Before buying and eating it, I wanted to see if the ingredients measured up to the claim. They were worse than other snacks at the same counter, so I didn’t buy the brownie.

Companies, mutual funds, and ETFs mostly claim to be sustainable these days. But how does the average investor know what’s really inside? There is a lot of what is called “greenwashing” where firms overstate just how sustainable or compliant they are with environmental, social, and governance (ESG) criteria.

Many retail investors are looking for tools and data to cut through the greenwashing, with Millennials, Gen Zers, and women particularly interested in investing this way and with these tools. There are firms that do in-depth research and assign ESG ratings to individual companies, mutual funds, and ETFs: MSCI, Clarity, and perhaps the best known Sustainalytics, which is now owned by Morningstar. I’ve been on panels and interviewed researchers for these companies, and I know their reports are usually subscription only and can cost quite a lot of money.

I have a ChatGPT account, so I asked it to “Write an ESG rating for Bank of Montreal in the style of Sustainalytics.” It took about 10 seconds: ChatGPT had “learned” that BMO has a medium level of ESG risk and a score of 27.3.

But then I tried a really “old-fashioned” approach: I googled “Sustainalytics Bank of Montreal ratings.” In less than a second, I found a link to the actual Morningstar Sustainalytics site and its 22 November updated report on BMO.

  1. It was fast.
  2. It was free.
  3. It said that BMO has a rating of 15.3, which is actually the lowest ESG risk category!

To be clear, if I wanted to dive deeper or compare BMO with other Canadian banks, I would have to subscribe. But at a high level, a simple Google search reveals that there is a lot of good, free, accurate information out there.

So, do not use ChatGPT as a research tool. I have read many articles about how generative AI can “hallucinate” and give answers that sound plausible but are badly wrong. Generative AI has all kind of uses in the advertising industry and elsewhere. But for research, stick with search.

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5. Am I too old for stocks?

“I am 72 years old and a bit nervous that my portfolio is 70% in equities. My discretionary money manager feels this is appropriate based on the fact that I am not going to need to make any withdrawals for at least 10 years and my overriding goal is to leave a solid estate to my three adult children. I still worry because I have always read that we should reduce equity weights as we get older. What do you think?”

Age is just one number among many: It is a myth that one size fits all. I cringe every time I hear sweeping statements about what investors should do based on their age. Have you heard the Rule of 100? Start with 100 and subtract your age. That gives you your optimal stock asset allocation. The rest should be in bonds and cash. A 30-year-old would have 70% in stocks, an 80-year-old would have only 20%, and so on.

But this isn’t even a good rule of thumb. Many younger investors are saving for a home purchase and need to maintain a lot of liquidity in their portfolio, or they might be highly risk-averse and prefer to own only short-term bonds. Many older investors have most of their portfolio invested in stocks because they want to grow their wealth for the next generation.

The time horizon is indeed a factor that goes into an investment strategy. But a specific investor may have multiple time horizons to consider: retirement, buying a vacation house, gifting money to a child or grandchild, etc. A proper investment policy includes many inputs, such as return requirements, risk tolerance, time horizon, liquidity needs, tax considerations, legal constraints, and unique preferences.

Since you are nervous about your equity weighting, I recommend sitting down with your adviser and reviewing your overall investment objectives. From there, you will have a better understanding as to why certain asset classes are in your portfolio.

Don’t focus on your age; focus on making investments that are an appropriate fit for your personal objectives.

So, what did I miss? What could I have explained better? Please send me an email with your input or sound off in the comments section; it may even provide fodder for a follow-on article.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images / Sean Russell

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About the Author(s)
Barbara Stewart, CFA

Barbara Stewart is a chartered financial analyst (CFA) with 30 years of investment industry experience; five years as a foreign currency trader, more than two decades as a portfolio manager for high net worth entrepreneurs, and during the past six years, as an interview-driven researcher for multiple global financial institutions. She is a keynote speaker for CFA societies, banks, stock exchanges, and industry conferences globally, and she is a columnist for CFA Institute, Canadian Family Offices, and Canadian Money Saver. She is on the Advisory Board for Kensington Capital Partners and also is the Ambassador for the Kensington Women’s Forum. Fourteen years ago, Stewart saw a need to challenge outdated financial industry stereotypes and share positive messages about women and money. Today, she is recognized worldwide as one of the leading researchers in women and finance. Rich Thinking® global research papers quote smart women and men of all ages, professions, and countries, and are released annually on International Women’s Day, 8 March. To find out more about her research, visit Barbara Stewart.

5 thoughts on “Portfolio Confidential: Five Common Client Concerns”

  1. JV says:

    Hi. I just retired at 57. I’m about to commit to a 10 year treasury ladder of about 1million, 1/2 of the fixed asset portion of my portfolio. In the next 2 years the other half of that money will come due and I intend to do the same. We have 4m total and can live comfortably on 120k/year. No debt. I’m a bit nervous about locking in that money, but rates are good, I’m not a market timer, my severance will cover about 2 years and I have 2 years of expenses in sgov, a high yielding money market equipment. Thoughts on the ladder?

    1. Hi JV. I offer confidential advice only to subscribers of Canadian MoneySaver magazine and I currently have a backlog of questions. Sorry if this wasn’t clear – I am looking for input from advisors as to how they might improve on the five most common client questions listed. Best of luck with your situation and congratulations on your retirement. Kind regards, Barbara

  2. ASSETIFY says:

    fixed return investments

  3. Omar Ziyad Hadi says:

    Hello. Thank you for your very helpful answers. One question that comes to mind though is why you advise getting out of mutual funds. Are ETFs always a better option than mutual funds. For equity investing that’s probably true, but what about for income-oriented investors who want steady monthly returns from investment grade corporate and high yield bonds? I appreciate that there are bond ETFs but isn’t active management when it comes to bonds sometimes worth it?


    1. barbara stewart says:

      Hi Omar, I don’t always advise getting out of mutual funds but nearly always! The reason is that the fees are very high particularly here in Canada (highest in the world). Anytime an investor is paying more than 1% I question why and would look carefully at the specifics of the fund. With regard to bond funds and active management – sure there may be one or two that do well but I wouldn’t be a buyer of a bond fund unless the fees were well under 0.5%. Here is an excerpt from an article (paywall) written in January 2023 by a former bond fund manager for the Globe and Mail:

      “To start, there are two considerations. The first and most important one is costs. Investors are all too often fooled by not factoring in what these are, especially over the long run. Many investors pay too much through high fees in mutual funds.

      Although an investor may be okay with paying more than 1 per cent in annual fees for a standard diversified bond fund, it is a mistake.

      Let’s take a simple mathematical calculation. If one invests $100,000 over a 20-year period and bonds return 4 per cent annually before fees, that investment – assuming the interest is reinvested – will be worth $219,112. If those bonds were in a mutual fund with a 1.1-per-cent fee, the investor would be left with $177,136 – $41,976 less. That is more than 40 per cent of the original investment. If the investor had chosen an exchange-traded fund at a cost of 0.1 per cent in fees – which is typical these days – they would have $214,937 – $37,800 more.””

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