Recovery delayed

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  These are certainly tough times for investors. The markets are testing their lows of last April and any breakthrough below those levels would be a signal of more trouble ahead. This is a time for caution. There may seem to be bargains out there, but overall the markets are still pricey by historic standards. So maintain a conservative position. The turnaround will eventually come, but there is no way of predicting exactly when. Right now, I’m not expecting a robust recovery until some time in 2002 – but the markets are so volatile that my opinion could change so stay tuned.

This month’s edition contains some advice about how to put together a low-risk portfolio for these difficult times, some capsule reviews on a few mutual funds that are working well in the existing climate, and news about a high-performance fund category that is largely ignored.

You are invited to forward a copy of this newsletter to anyone you think may be interested in the information contained in Investing Today. Those who wish to become subscribers may sign up at http://www.gordonpape.com/InvestingToday/Newsletter.cfm

There is no cost or obligation. Our hope is that this newsletter will spark your interest in some of the membership services we offer, details of which can be found at http://www.gordonpape.com

BUILDING A PORTFOLIO FOR TROUBLED TIMES

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  Recently, I had conversations with two friends who were bemoaning the terrible losses they had experienced over the past year. Both were debating whether to stick with their current positions or completely overhaul their portfolios.

There’s no easy answer to that dilemma. There are too many variables: age, risk tolerance, quality of the securities, asset mix, tax situation (for non-registered accounts), and more. However, if you’re down more than 15% year over year and you’re feeling uncomfortable about what has happened, you owe it to yourself to devote some time to a complete portfolio review.

Start with the basics - your asset mix. What percentage of your money is invested in the stock market, either directly or through equity and balanced mutual funds? Under the current market conditions, a prudent investor should have no more than 50% equity exposure. Older people (those over 60) should have even less.

Next, carefully assess the nature of your equity investments. Many of the stock selections in our Internet Wealth Builder newsletter have done quite well despite the poor market environment. The great majority of those were what are known as “value” stocks, companies that are trading at reasonable to cheap prices relative to their earnings and which have strong balance sheets and a sound core business. Two of our contributing editors, Irwin Michael and Tom Slee, use value criteria in making their selections.

It is likely that the value cycle will continue for some time to come. Therefore, your equity emphasis should be on that side of the equation. That is not to say you should ignore growth stocks or mutual funds entirely - they will come back at some point and you want to be there when they do. But your weighting should definitely be to the value side, by at least 60-40. If it isn’t, then some restructuring is in order. If your portfolio is non-registered, be sure to consider the tax consequences of any sales, however.

Now take a look at your fixed-income assets - your bonds, preferred shares, GICs and the like. A well-balanced portfolio should hold somewhere between 25% - 45% in these types of securities.My recommendation is that you trade off return for safety. Go for short-term bonds (maturities out to five years) or for some top-quality preferreds if you’re investing in a taxable account. Don’t lock in for the long term at current rates. Even though interest rates are likely to drift lower in the coming weeks, making a big bet on long term bonds at this stage in the cycle doesn’t look like a smart move.

Finally, to cash. Your cash reserves should be anywhere from 10% - 20% of your assets. I recommend that half that money be held in U.S. dollars as protection against a further decline in the value of the loonie. I make that suggestion in full knowledge of the fact that the U.S. dollar is overvalued and has been in decline against currencies like the euro in recent weeks. However, it is more difficult for Canadians to hold euros (or Swiss francs or Sterling), especially in registered plans. Moreover, most of us are more likely to have a practical need for U.S. dollars in the future.

No one likes to lose money. And if you lose a lot, you may endanger your health worrying about it. Your portfolio should be constructed in such a way as to offer you reasonable profit opportunities without exposing you to heavy losses. If it isn’t set up that way now, make it so.

(This article is abridged from the Sept. 4 edition of the Internet Wealth Builder. For membership information: http://www.gordonpape.com/newsletter/iwbnl.cfm)

THREE TOP PERFORMING MUTUAL FUNDS

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  Finding equity funds that will do well in the current bear market isn’t easy. I’ve just completed a review of all the major fund companies for my 2002 Buyer’s Guide to Mutual Funds, which will be published in November. Here are three little-known funds that are working well for investors right now.

@rgentum Canadian L/S Equity Portfolio. Okay, so you’ve never heard of it. Not many people have. The company struggled for recognition from the outset and last year joined forces with another small player, University Avenue, in an effort to gain some critical mass. The @rgentum funds use a proprietary computer screening program in the stock selection process, with mixed success. This fund stands out from the group, however. It’s a type of hedge fund, but without the high cost of admission normally associated with such funds (you can get in for just $500). The managers attempt to minimize stock market risk by taking both long and short positions. The fund invests mainly in large and mid-size companies, with a median market float of $250 million. The formula is working amazingly well in this lousy market. The fund gained an impressive 18.5% over the year to July 31 and added another 7.9% over the 30-day period to Sept. 6. I’m not normally a fan of hedge funds, but you’ve got to love those numbers. You should be able to buy it through any financial advisor or discount brokerage service.

IRIS Dividend Fund. This fund is available through branches of the Laurentian Bank of Canada on a no-load basis. It’s really more of a blue-chip stock fund than a classic dividend fund, and it has been hanging in very well during this market tumble. The one-year gain to July 31 was 23.5%, and the fund just about broke even over the most recent 30 days – quite remarkable in the light of what was happening elsewhere.

Saxon Stock Fund. I just can’t understand why more people aren’t investing in this great little fund. It has a long and distinguished track record, it’s a no-load fund, it has a good safety rating, and its management expense ratio (MER) is very reasonable. What more could you want? It earns a top $$$$ rating in the 2002 Mutual Fund Guide, with good reason. Over the past decade, it’s the number four ranking equity fund in Canada with an average annual gain of 14.9%. It earned almost 30% in the year to July 31. Manager Richard Howson uses a value style, so the you have minimal risk. Buy directly from the company if you live in Ontario, call 1-888-287-2966. In other parts of Canada, you’ll have to go through a broker and pay a small commission.

If you would like to order a copy of the 2002 Buyer’s Guide to Mutual Funds at our special pre-publication price of 25% off, go to http://www.gordonpape.com/bookstore/productdetail.cfm

IWB STOCK PICK IS TAKEOVER TARGET

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  One of the stocks on our Internet Wealth Builder Recommended List has just been the target of a friendly takeover bid. Anderson Exploration was recommended by contributing editor Tom Slee in September 2000 at $30.50. Last week, Devon Energy of the U.S. announced an offer of $40 a share, giving IWB investors a 31% return on their money in one year.

THE NUMBER ONE FUND CATEGORY Believe it or not, there’s a category of mutual funds that has been posting excellent returns this year, in the face of all the market turmoil. To the end of last week, this small group of funds showed an average year-to-date gain of 9.1%. To find out more, read the article titled A Profitable Fund Category That Everyone Ignores on the Home Page of our Web site: http://www.gordonpape.com

KENDREW PAPE TAKES OVER CBC COMMENTARIES

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  As of this week, my son, Kendrew, has taken over the weekly Pape’s Notes financial commentaries that are heard on CBC radio stations across Canada. He will bring a new perspective to these broadcasts, with special emphasis on such topics as wealth building, socially-responsible investing, and teaching children about money (he has three youngsters of his own). He’ll also be providing tips on buying and leasing cars – he has co-authored three books on the subject.

You can read the transcript of his first commentary, dealing with Visa’s new Buxx card for children, at http://www.gordonpape.com/cbcradio/Main.cfm?CBCTranscript=218

SMART MONEY COMMENTARIES TO APPEAR ON BUSINESS TELEVISION

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  I will begin a new series of weekly financial commentaries on BTV (Business Television) in October. BTV is broadcast on several stations across Canada as well as on America One in the U.S., which reaches 38 million households.

BTV covers a wide range of business and investor-related subjects, including in-depth profiles on top companies in the news. You can visit their Web site at b-tv.com

My items will be called “Smart Money” and will offer advice that will help investors achieve the maximum profit potential with minimum risk. The fall series will begin on the weekend of Oct. 6-7. Participating networks/stations across Canada include Canadian Learning Television (CLT), the CHUM network in Ontario (The New VR, The New RO, etc.), CHEK 6 and The New VI in B.C., Global CKMI in Quebec, and the A-Channel in Alberta and Manitoba. Check your local listings for date and time.

WE’LL ANSWER YOUR MONEY QUESTIONS

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  Each week we receive dozens of financial questions from people across the country on topics ranging from mutual funds to taxes. We can’t respond personally but we select five of broad interest each Monday and post the answers on the Web site. To read the latest series, or to send us a question yourself, go to http://www.gordonpape.com/qa.cfm

INVESTOR PACKAGE OFFER

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  From time to time we offer visitors to our Web site the opportunity to subscribe to a package of all our services for a special combination price. Until the end of September, you will receive a one-year membership in our e-mail Internet Wealth Builder newsletter (44 issues), a year’s subscription to the electronic edition of Mutual Funds Update (12 issues), and unlimited access to our On-line Mutual Funds Database for a year for an all-inclusive price of $149.95 plus applicable taxes. Check out our Home Page at www.gordonpape.com for complete details.

That’s our report for this month. We’ll rejoin you again in early October.