How the rich stay rich

Wisdom from an expert.

Ever think the rich might know something about the markets the rest of us don't? After all, the wealthy can afford the best financial advice money can buy. With that in mind, we spoke to Paul Taylor (pictured), the senior vice-president and chief investment officer at BMO Harris Private Banking. His company manages $7.9 billion in assets for high-net-worth individuals (i.e., the loaded). Here's his take on the Canadian market, as well as others abroad.

Taylor points out that Canadian stocks have enjoyed a relatively long run. The S&P/TSX composite index, he explains, has risen 96% from its October 2002 trough. Taylor adds that only once in the past 40 years has the index increased more than 100% from trough to peak. (The index's recent pullback after cracking 12,000 also suggests the Canadian market may be finally running out of steam.) What's more, he says, most of last year's gains in the S&P/TSX composite came from energy stocks. Taylor does expect oil prices to climb over the long run, but he believes they still follow a cycle that currently seems “a little long in the tooth.”

Nevertheless, Taylor thinks our stocks will finish the year up between 7% and 9%. But he adds that a slowdown in the U.S. economy–brought on by a cooler housing market, high energy prices and the Fed's interest rate hikes–could put an end to the Canadian bull market in 2006.

So what should an investor do? Get defensive, says Taylor. He favours the telecommunications, consumer staples and utilities sectors of the Canadian market. Companies in these segments tend to have mostly domestic sales, so they're less susceptible to a slowdown in the U.S. economy. Plus, Taylor expects the greenback to depreciate against the loonie–another reason to favour Canadian businesses that rely on revenues at home. He also notes utility companies, with adequate cost containment systems in place, often have stable cash flows. As for consumer staple companies, they sell things people need in good times or bad–and that means reliable earnings.

Taylor does see opportunities outside of those sectors. For example, some of his clients' portfolios include Extendicare (TSX: EXE.SV), a Markham, Ont.-based operator of nursing homes in Canada and the States. Cameco (TSX: CCO), the uranium producer headquartered in Saskatoon, is another BMO Harris Private Banking pick. Taylor also likes banks and insurance companies, in particular the Toronto-Dominion Bank (TSX: TD) and Manulife Financial (TSX: MFC).

Looking beyond our borders, Taylor thinks Japanese stocks appear attractive. Even though the Nikkei 225 has risen roughly 60% over the past two years, he still sees value in that market. He says Japan's economic recovery seems firmly in place, and he expects the yen to appreciate against our buck, which could give an added boost to returns on Japanese equities. Taylor also believes European stocks deserve a closer look. He says economic growth seems to be returning to the continent. As support, he points to the fact that the European Central Bank has increased interest rates for the first time in years. As well, he says European companies look cheaper than Canadian and U.S. ones.

All told, Taylor's advice doesn't reveal any secrets. But while his strategies may not catapult you into the ranks of the rich, they just might help you keep what you already have.