February 2009

Lessons from 2008 – Managing risk starts with fi xed income

By: James Parkyn

Last year is very likely to go down as one of the most signifi cant years in capital market history. US large cap stocks delivered their worst returns since 1931, with the S&P 500 reporting a loss of 37%! During periods of extreme volatility, many investors reevaluate the level of risk they’re willing or able to take.

PWL’s disciplined investment philo sophy is based on the notion that managing risk begins with the fixed income allocation of your portfolio – it is the stabilizer that helps to cushion losses in periods of extreme uncertainty.  We believe that when you set your long-term asset mix, the first decision you should make is how much to allocate between safer fixed–income assets and riskier equities and income trusts. Keep in mind that risk and return are related – safer assets tend to produce lower future expected returns.

But not all fixed income is safer. When fixed income markets made the headlines last year, the problems were in the high risk sectors like sub-prime mortgages and frozen asset-backed commercial paper. Other fi xed-income sectors performed reasonably well; in fact, Canadian  fixed-income assets generated positive returns in 2008, as measured by the DEX Bond Universe Index. PWL’s disciplined investment philosophy is to invest in the highest quality fi xed-income assets with low credit risk, short duration maturity and hedged foreign currency risk. You’ll see that, although your portfolio lost money in 2008, the loss experienced was far less than it could have been due to the stabilizing effect of your  fixed-income assets.

There’s no denying that current conditions are unsettling, to say the least. What should you be doing to weather the storm?

  1. First, don’t be distracted by the day-to-day “noise” in the media. Knowing that the stock  market is up (or down) by a few hundred points does nothing for your mental health – or the health of your investments. Focus on your long-term goal, and know that, with our help, you will reach it in spite of the ups and downs along the way.
  2. Resist the temptation to change your asset mix in the midst of market volatility. Usually, this is a reaction based on fear rather than a rational decision that will help you to reach your goals. Review your objectives and base your decisions on a thorough analysis with your PWL Advisor.
  3. And, fi nally, if you have any questions contact your PWL Advisor. We’re here to help you. Our  guidance is based on solid academic research and is designed to protect your investments from excessive risk.

James Parkyn

Portfolio Manager
PWL Capital Inc.