Millions of Canadians lost sleep during the past year as slumping stock markets continued to kick the stuffing out of their retirement savings plans.

Although the 37-year-old Toronto software consultant's RRSP portfolio slipped in value by 6 per cent, his losses were minor compared with the double-digit hits taken by many other investors.

"I had losses but it could have been an awful lot worse," he says. "I'm sitting pretty good in these tough times."

Mr. Grabowski credits the relatively positive showing of his RRSP last year to the fact that his portfolio is designed to defend against market swoons, such as the prolonged bear market of the past three years.

And when markets turn around, he's confident his investments will score positive returns quicker than those of many others.

His strategy is built on principles that are music to the ears of most financial advisers. In particular, he has made a solid effort to diversify his portfolio. Four years ago, his RRSP consisted of 80 to 90 per cent equities. Since then he has rebalanced his holdings so that equities now make up about half, with the remainder split among less risky GICs, balanced funds, money-market funds and a mix of long- and short-term bonds.

He also goes to great lengths to purchase equities and funds tied to good-quality companies and has regular one-on-one meetings with the broker and personal financial adviser who handle his money. Mr. Grabowski has also managed to pay off most of his debts, including his mortgage.

"This is an overall strategy that should be the same all the time, even in positive times when you are chasing gains," says Tony Rickert, managing partner at Rickert Financial Group Ltd. in Waterloo, Ont., and Mr. Grabowski's adviser.

How a portfolio should be divided to ensure the appropriate diversification and protection depends on the age and risk tolerance of the investor. For a 40-year-old, Mr. Rickert's rule of thumb is 50 per cent in equity mutual funds, 30 per cent in balanced funds and 20 per cent in money-market funds or cash. The split for a 60-year-old would be 50 per cent fixed income, 30 percent balanced funds and 20 per cent equities.

But just splitting investments among different asset classes isn't enough. It's also necessary to diversify by sector, geographic region and management style "so your portfolio is exposed to a little bit of everything," says Kyle Mizak, an investment strategist with Investors Group Financial Services Inc. in Calgary.

"Diversifying by management style is important because there can be huge differences in gains from growth and value investment products," adds Mr. Mizak, noting that in the three years to the end of 2002, Canadian growth equities lost an average of 13.6 per cent while value stocks were were up about 7 per cent.

Further protection and future potential can also come from focusing on good-quality companies, adds Jason Brazeau, an investment executive with Scotia Capital Inc. in Ottawa, who notes blue chips not only outperform less established firms and offer consistency, but also pay dividends that can be a substantial part of an investor's return.

Mr. Brazeau recommends 80 per cent of an investor's equities consist of companies with household names in the utilities, banks, life insurance and energy sectors. "Buy five really good-quality companies, rather than just one" with solid earnings and a good record over the long term, he suggests.

Mr. Rickert urges defensive-minded clients to take the mutual fund route when buying equities, noting that even quality companies can suffer when markets falter. "That way a company like Bombardier is just a small part of your account. If it goes down by 30 per cent, your actual loss in the fund is only 3 or 4 per cent. You have other stocks in your portfolio to cover a catastrophic drop."

Another way of defending against market drops and making gains when markets go on a tear is by purchasing segregated funds, says Chris Palmer, a financial adviser with Berkshire Investment Group Inc. in Bedford, N.S. These guarantee the return of 75 to 100 per cent of invested capital at the end of 10 years even if markets slump; if markets rise, investors reap the gains.

Drawbacks include a 10-year lock-in period, which could mean investors miss other opportunities and management expense ratios that are half to 2.5 per cent higher than other funds charge, which will eat into a fund's return.

"Over the years, seg funds have met the returns of most mutual funds," says Mr. Palmer. "The higher MER is the price you pay for security."

Dan Nolan, a financial adviser with DNL Money Management in Ottawa, says investors can protect themselves from the valleys and prepare for the peaks by keeping in close touch with a financial adviser. He recommends quarterly phone calls; some advisers like to meet their clients face to face every three months.

Such meetings enable advisers to assess changes in a client's life that may require adjustments to a financial plan.

Regular pow-wows also allow advisers to rebalance asset allocation mixes that may be out of whack as market conditions change, Mr. Nolan says.

Mr. Grabowski says three meetings with his adviser were a key reason he slept soundly in 2002. "My adviser showed me how other funds were performing compared to mine and I realized I wasn't doing too badly. I realized it was not just me losing money over the past 12 months and that helped ease my concerns."