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M A Y / J U N E 2 0 0 5

InSite News and views for the online investor

In the last issue of InSite you learnedthat a disciplined approach to invest-ment selection goes a long way towardinvesting success. Now, with a solidplan in place and the right mix ofinvestments selected, the ongoingmanagement of your portfoliobecomes essential to help you stay ontrack and reach your investing goals.

Although you have a clear definitionof where you want to be, investingmarkets are fluid and the market con-ditions that will help you reach yourdestination are ever changing and

ever evolving. This is where active management of your portfoliobecomes the defining characteristic of a successful investor.

Just like sailing, where it is necessaryto make adjustments to the sail inresponse to changing wind conditions,it is crucial to stay disciplined andmake these important adjustments to the ‘sails’ of your portfolio to maxi-mize the market power available toyou at any given time.

Consider your management approach: how many times do youwant to review your portfolio in agiven period? Having an active man-agement strategy in place will helpensure that you review the gains andlosses in your portfolio, as well asyour asset allocation, against yourplan on a regular basis. You can rebalance and make the necessaryadjustments whenever appropriate.An effective strategy removes theemotion from the investing equation,and gives you greater peace of mind.

To assist you with the ongoing management process, you can takeadvantage of the tools and resourcesavailable. For instance, Alerts havebeen designed to provide you withspecific market news and stock pricechanges from virtually anywhere. You can also use Stop Orders to helpprotect your profits and guard againstdownside risk, Automatic PurchasePlans to build your portfolio overtime, and Options Chains that willgive you the full picture on optionscontracts, and help you implementthem to your strategic advantage.

Ongoing, active management strategies are important to long-termsolid, portfolio performance. Througha disciplined approach to investmentmanagement, investors are able toachieve maximum results in any market conditions, and reach theirgoals sooner.

Reach Your Goals Sooner with Ongoing,Effective Management Strategies

“An effective

strategy removes

the emotion

from the investing

equation, and

gives you greater

peace of mind.”PLANNINGyour

strategy

SELECTINGyour

investments

MANAGINGyour

portfolio

SUPP

ORT SUPPORT

SUPPORT

Explore Our SiteWith Alerts, you can stay connected to the market, follow stock performance,breaking news and more fromvirtually anywhere. To set up Alerts on your cell phone,PDA or your desktop email,simply sign in to your accountonline and under Tradingchoose “Stock & News Alerts”.

2 May/June 2005

When it comes to managing your port-folio, selecting the right mix of assetsis only half the investment equation. It is also important to know when tosell, and then have the discipline toexecute it.

Hold your winners too long and youmay fail to take profits off the table.Hang on to your losers too long andyou could incur losses. Successfulinvestors know that properly manag-ing your investments means planningan exit strategy from the onset.

Your Exit StrategyAn exit strategy is simply the pricepoint at which you choose to sell. It is a critical investing component that

helps manage risk. Setting a sell pricein advance also takes the emotion outof investing.

A sell point could be as simple as whenyour investment rises or falls 20% offyour purchase price. It can also be

more complex. You might base a sellpoint on fundamental data, such as revenue growth, profit margins, orprice-to-earnings ratios (P/E). You may,for instance buy into a business with aP/E ratio lower than its competitors —suggesting its stock sells at a discount.Your exit strategy may be to sell whenits P/E rises to that of its peers.

Technical data can also trigger sellsignals. For example, you might sell a stock when it crosses a specific mov-ing average or hits a new 52-weekhigh or low.

Triggering an ExitThere are a number of online tools tohelp investors plan and implementexit strategies:Alerts: Automated Alerts can sendinformation about specific stocks toyou electronically, from virtually any-where. Triggers for sending Alerts canbe based on various criteria, frommoving averages to price and volume. Order management: Setting a StopOrder at a predetermined price canalso automate the trading process andfrees you from following the marketson a daily basis. For more informationon Stop Orders, read Stop! ManageExit Strategies Automatically, includ-ed in this issue of InSite.Data and filters: Quote tools providea wide range of detailed informationabout stock prices, fundamental dataand recent news releases to help planan exit strategy.Portfolio tracking and performance:Know whether you are in your “sellzone” using this tool, which identifieshow much you have made or lost onan investment.

Planning your exit strategy helps protect your potential gains andguards against downside risk – givingyou peace of mind. Take advantage of the online management tools available to help you create and exe-cute an exit strategy and stay on a disciplined course.

Spring is often a good time of the year to cleanup and take stock. That exercise is particularlyimportant when it comes to your investment

portfolio. While developing a sustainable planand selecting suitable investments are critical

steps for investors, it is equally important to review your portfolio on aregular basis to ensure it continues to perform according to plan.

To help you with this essential process, this issue of InSite is filled withstrategies designed to help you effectively manage your portfolio on anongoing basis. Our lead article outlines the key elements of a disci-plined approach, while another article shows how to use Stop Orders as an online management tool. You will also learn about planning an appropriate exit strategy and options investing.

I hope you find this issue both educational and informative. You canvisit bmoinvestorline.com if you would like additional resources andtools on portfolio management.

Sincerely,

Thomas A. FlanaganPresident & Chief Operating Officer

InSiteExit Strategies Provide Peace of Mind

Contributor’s Note

3 May/June 2005

The options market offers investors avariety of strategies to take advantageof different market perspectives. Youcan use options to speculate the pricemovement of an underlying security,increase returns, protect a profit, ortake advantage of a flat or volatilemarket. The use of options can be an added value to every portfolio.

There are two primary reasons forbuying options: the high potentialleverage and the limited risk. Highleverage, since an investor stands tobenefit from an increase or a decreasein the value of the underlying stockwhile investing only a fraction of the capital needed to buy or to shortsell the stock outright. Limited riskbecause the maximum loss is the premium paid.

Buying call options allows investors to act on bullish views, while buyingput options allows them to profit from expected declines in the marketprice or to protect holdings against possible drops.

For example, a bullish investor onABC stock trading at $30, has twochoices:

1) Buy 1,000 shares of ABC at $30,investing or borrowing on margin$30,000.

2) Buy a four-month call option onABC at a $30 strike for $1.50,investing $1,500.

If four months later ABC is trading at$35, the return on the first investmentis 17% and on the second one, 233%.That’s the power of leverage! Themaximum loss for the option investorin this case is $1,500 if at expirationthe price of ABC is at or below $30.

Buying call options could also be ahedging strategy for short sellers,since they will be locking in the purchase price of their short position in case the market goes against theirforecast.

A bearish investor can buy put optionsas an alternative to short selling theunderlying stock and benefit againfrom leverage should the stock pricedecline. Most of all, buying putoptions allows investors to hedgeagainst declining markets.

Let’s take the example of an investorwho purchased ABC at $30. ABC isnow trading at $35. This investor hasshort-term concerns about the pricedirection because of merger rumours.Buying a four-month put option onABC at a $35 strike for $1.25 allowsthe investor to lock in a profit on ABCwithout liquidating the stock positionand, of course, still benefit from theupside potential should the value ofABC continue to rise. This strategy iscalled protective puts and can also beused to defer capital gain from oneyear to the other.

Finally, let’s take a quick look at selling options. Writing call optionsagainst existing stock positions (cov-

ered calls) is a means of generatingincremental revenues during stableprice periods. The premium receivedby the call seller also acts as a cushionagainst modest price declines. Theinvestor can do a covered call write asan alternative to an open sell order ata limit price. The strike price of thecalls sold should be the target sellingprice for the underlying security andif assigned, the investor’s final sellingprice will be the strike price plus thepremium received. This strategy out-performs buy and hold only in flat ormoderately bullish markets.

These are just a few of the manyoptions strategies. Options offer greatadvantages to astute investors. Theymust nonetheless bear in mind thatinvesting in options carries certainrisks. A clear understanding of theserisks as well as potential returns is akey to successful options trading.

Options for Protecting Your Portfolio and Enhancing Returns by Gladys Karam of the Montréal Exchange

“ Options offer

great advantages

to astute

investors. They

must nonetheless

bear in mind

that investing in

options carries

certain risks.”

Balanced Income &Growth Model PortfolioIn the March/April issue of InSite,Ranga Chand talked about the Growth& Income Model Portfolio. In this issuehe profiles another one of his sevenHeavy Hitter®* Model Portfolios.

The Heavy Hitter Balanced Income &Growth Model Portfolio is designed toprovide investors with a combinationof income and long-term growth of capital. It is intended for thoseinvestors who can tolerate moderatefluctuations in the value of their port-folios in exchange for potentially high-er long-term returns. It is not suitablefor investors with a short investmenttime horizon.

The target allocation of the portfolio is 50% stocks and 50% fixed incomeand consists of five underlying HeavyHitter Select Funds (Table One). Thesefive funds like their counterparts in theHeavy Hitters Select Funds’ list, allhave a strong performance history,superior risk/reward ratios, a mini-mum 5-year track record and below-average management fees within theirrespective categories.

On the equity side, the portfolio is welldiversified and currently holds about150 Canadian stocks covering all themajor market sectors and around 50foreign stocks of which more than 90% is in developed markets and theremainder in emerging markets. Onthe fixed income side, about 50% isinvested in short-term bonds andaround 25% each in medium and long-term bonds. The average term-to-maturity of the portfolio’s bond hold-ings is around 8 years.

The investment returns for theBalanced Income & Growth ModelPortfolio are shown in Table Two. Theportfolio’s average annual total returnfor the 5-year period ending February28, 2005, was 12.0% and on a yearlybasis the portfolio has delivered posi-tive returns for each of the past 5 years

with returns ranging from a low of 1.3%in 2002 to a high of 19.3% in 2000.

The Balanced Income & GrowthModel Portfolio has a moderate riskprofile. Although there is a 1 in 20chance that returns will be negativeover any 1-year period, the portfoliohas delivered positive returns over all3 and 5-year holding periods. Lookingat all eighteen 5-year rolling periodsfrom September 1998 to February2005 (Table Three) returns have aver-aged 11.1%, ranging from a high of12.6% to a low of 10.5%.

To learn more about the Heavy Hitter Model Portfolios, visit bmoinvestorline.com/EducationCentre/MutualFunds.

Ranga Chand is widely recognized as one of

Canada’s leadingeconomists and mutualfund analysts. He isalso the Founder

and President of the research and consulting firm Chand, Carmichael & Company Limited.

4 May/June 2005

Heavy Hitter Model Portfolio Corner by Ranga Chand

5 May/June 2005

InSite

Stop Orders are effective onlinetools that give you the disciplineto manage your exit strategy,helping you to lock in profits orminimize your losses early.

Simply, a Stop Order allows youto set a predetermined pricepoint at which you would becomfortable selling your invest-ment. There are three types of Stop Orders available atbmoinvestorline.com:

Sell on Stop: Helps you to mini-mize potential losses if the pricetakes a sudden downturn by set-ting the sell order at a point ofyour choosing below the currentmarket price.

Hard Stop: Allows you to set a “hard” price at which to sellyour stock and lock in yourgains. Hard Stop Orders let youplan your exit strategy up frontat any time and have an indefi-nite expiry date.

Trailing Stop: Rather than usingspecific price points, this flexibleorder exits a stock based on per-

centage changes. A Trailing StopOrder follows the price of a stockup and resets the trigger sellprice, or stop price, each time.For example, if a stock drops, say20%, the order to sell is execut-ed. If it closes higher at the endof a trading day, the TrailingStop Order resets the stop priceat 20% below the new price.

Stop Orders are simply market orders or instructions, so there is no guarantee you will get aspecified price. However, StopOrders take the emotion out ofexecuting an exit strategy andhelp manage your risk.

For more information, read the Investment Safety SwitchReport courtesy of The OxfordClub (www.oxfordclub.com), at bmoinvestorline.com/WhatsNew/trailingstop.html.

Stop! Manage ExitStrategies Automatically

“...set a pre-

determined

price point

at which you

would be

comfortable

selling your

investment.”

Heavy HitterUpdateTo qualify as a Heavy Hitter SelectFund, a fund must be a consistent topperformer with superior risk/rewardratios, solid management, a minimum5-year track record, and be availablefor purchase.

Since the Norrep Fund (a Canadiansmall-cap fund) is no longer acceptingboth new and additional purchases,it will no longer be featured on theHeavy Hitter Select Funds list. Thefund has been replaced by the EthicalSpecial Equity Fund, another HeavyHitter in the same category.

To view the complete Heavy HitterSelect Funds list, sign in to youraccount, go to the Research section,select Mutual Funds, and choose“Analyst Select Funds”.

Feature of the MonthAttend one of BMO InvestorLine’s semi-nars to learn more about theDisciplined Approach toInvesting, valuable invest-ment strategies, or the latesttools and research.

To find a seminar near you,visit bmoinvestorline.com,go to Quick Links and clickon “Seminars”.

InSite is published six times a year by BMO InvestorLine Inc., and is distributed withBMO InvestorLine account statements. To requestadditional copies of this issue, please send anemail to insite@bmoinvestorline.com. To viewpast issues of the newsletter, visit the EducationCentre at bmoinvestorline.com.

The articles in this newsletter are prepared as a generalsource of information. They are not intended to providelegal, investment, accounting or tax advice, and shouldnot be relied upon in that regard. If legal or investmentadvice, or other professional assistance is needed, theservice of a competent professional should be obtained.The information contained in this newsletter is based onsources believed to be reliable, but its accuracy cannot beguaranteed. The views expressed and information provid-ed in the articles are attributable solely to the authors.

The views expressed and information provided in “MySuccess Story” does not represent BMO InvestorLine'sviews nor should it be seen as a solicitation by BMO InvestorLine to purchase or sell any of the productsthat are being discussed. BMO InvestorLine is not liable forany special, indirect, incidental or consequential damages,(including, without limitation, lost revenues, lost profits orloss of prospective economic advantage resulting from theuse of the information or for omissions or inaccuracies inthe information) even if advised of the possibility of suchdamages, or for any claim by another party.

Commissions, trailing commissions, management feesand expenses may be associated with mutual fundinvestments. Please read the prospectus of the mutualfunds before investing, including the mutual funds in the model portfolios. Mutual funds are not guaranteed,their values change frequently and past performancemay not be repeated. The indicated rates of return arethe historical annual compounded total returns, including

changes in unit value and reinvestment of all distribu-tions, and do not take into account sales, redemption,distribution, or other charges or income taxes that mayhave reduced returns.

Please send comments and suggestions toinsite@bmoinvestorline.com or mail to: The Editor, BMO InvestorLine InSite, First Canadian Place,100 King St. W., 54th Floor, Toronto, ON M5X 1H3.

BMO InvestorLine is a member of BMO Financial Group.†As ranked by The Globe and Mail, 2002, 2003, 2004 &Feb. 5, 2005, by Gómez Canada Q1, Q3 2002 & Q2, Q42003 and by Watchfire GómezPro, Q2 2004. ®Registeredtrade-marks of Bank of Montreal, used under licence.®*“Heavy Hitter” is a registered trade-mark of ChandCarmichael and Company Limited, used under licence.™Trade-mark of Bank of Montreal, used under licence.BMO InvestorLine Inc. is a wholly owned subsidiary ofBank of Montreal. Member CIPF. 5122168 (05/05)

Update: UltimateGolf GetawayWith over 40,000 ballots from allacross Canada, the Ultimate GolfGetaway was a big success. Many of you proved your investment savvy with your knowledge of BMO InvestorLine’s comprehensivetools and resources available to helpyou successfully plan, select and manage your investments.

Thank you to all who participated!Watch for the full winner’s list,including the Grand Prize Winner, on bmoinvestorline.com!

CONGRATUL ATIONS TO OUR SECONDARYPRIZE WINNERS:

ROBERT HEASLIP$1,000 Golf Town Gift Certificate

ROSEMARY CORNFIELDTaylorMade Golf Clubs

MICHAEL FITZPATRICKThe Golf Gadget Bundle

JOSEPH V. LUCWeekend Golf Getaway

Is there a success story you would like to share withInSite readers?

H. Michael Collins from Gooderham, Ontario, who hasbeen an active BMO InvestorLine client for about tenyears, recently shared his story with InSite.

“In the 80s, I became interested in Royalty Trusts. After some weeks of deep investigation, I decided thatthe route was viable. I borrowed $25,000 from a bankat 8%. I bought trusts that over the next two years aver-aged 18%. When the bank loan was paid off with thedifference in interest versus trust payments, not onlydid I get a double tax benefit but a quick repayment. Irepeated this strategy five times over the next ten yearswith increasing trust returns. By the time I was ready

to retire I had increased my capital assets by 8 times.Remember, this method works when the life of theasset is greater than your own, although good trustswill keep increasing their life span on a yearly basis.”

My Insight “Spend the time necessary to completely inform yourself about the business or type of investment you are thinking of investing in. Then, when you are comfortable, you can take some risks. Your choiceshould be based on solid (global) research and personal investigation. Trust yourself.”

Tell us your story at insite@bmoinvestorline.com.

Please note: Emails you send to us are not encrypted. Do not send us any per-sonal information (example: account numbers and/or passwords) by email.

My Success Story