Recovering from a steep portfolio loss

Question

I have lost approximately 80% of my investments since March 2011. I work with a financial adviser in an investment firm and I am primarily invested in equities (93%) and cash (7%), mainly gold, minerals, and metals. I am wondering what your opinion is regarding my next option. I am unsure if I should investigate changing my portfolio entirely, accepting the losses and moving into some safer, less volatile investments; or stay status quo and hope something turns around within the portfolio.

Answer

Your question actually made my stomach turn. I don’t know whether to offer you a hug, a stiff drink or both.

Your investments fell 80% over a period in which the TSX was just 14% lower, gold was down 20% and mining dropped off by 30%. Your stockbroker clearly made some very bold predictions that did not come to pass, and you got hammered in the process.

The good news, if there is any to glean from your story, is that it ain’t over until it’s over. You haven’t actually “lost” money until you sell these underperforming stocks. And as you say, you’re wondering if now is time to do just that or if you should wait until things turn around.

The answer to this question depends on a few things including your financial situation, your assessment of your financial adviser and your view of the future.

Financial situation: Play money or retirement savings?

If you have a full pension or a wealthy spouse to rely on, or you are under age 35, the consequences of these terrible results are less dramatic than if you are 55-years-old and this portfolio represents your entire retirement savings. There is simply more urgency to get back on course if your financial future really is at stake, and so you should move quickly to a new more conservative strategy.

Financial adviser: Stay or go?

You need to do some hard thinking about how this happened. Did you know what you were getting yourself in to? Your financial adviser is obligated to ask you a bunch of questions under the “know your client” rules. Did your financial adviser behave in a way that was consistent with your risk tolerance, or was the portfolio more aggressive than what you thought you’d agreed to?

These questions are important because they will help you determine whether to stick with him or her or move to a new financial adviser. Even if you are comfortable with the actions of your current adviser, I recommend you get a few second opinions from other professionals to give you a base for comparison.

Future: Delayed or destroyed?

When the dotcom bubble burst something had fundamentally changed. Instead of the new-age “price to clicks” measures that had driven shares up into the stratosphere, investors returned to traditional valuation methods.

In your case, you need to ask yourself if the assumptions your financial adviser was making about the potential for your investments has simply been delayed or destroyed? “Hope something turns around” is not an investment strategy. It is a fairytale. And you already know how dark this tale can be.

If the investment assumptions are just taking longer than predicted to come to fruition, perhaps you wait around. But if the assumptions have changed—for example, there is actually no gold in that mine—it is best for you to salvage what you have left and move on.

You should also ask if your risk tolerance has changed. In the future, will you be able to stomach the risk that comes with such a volatile portfolio? Or will you only sleep at night knowing your money is more conservatively invested?

One potential plan

I don’t have the full picture on your circumstances or your feelings. But based on what I can surmise, here is a potential plan:

• Get a second opinion from two to three other financial advisers.
• Choose a new one based on your own criteria.
• Have them transfer your investments over without making portfolio changes.
• Develop a new investment strategy that is consistent with your goals and risk tolerance.
• Work with your adviser to sell out of your current positions in a tax-efficient manner and invest according to the new strategy. This might be a gradual process, or it might be quick.

My final piece of advice is to write down what you learned from the experience such that you never do it again.
Good luck.

About Bruce Sellery

Bruce Sellery is the CEO of Credit Canada, the country’s longest-standing non-profit credit counselling agency. He is a former MoneySense columnist.