Financial Focus: The three things (when It comes to investing)
By Medicine Hat News on November 10, 2018.
With the market volatility of late, and the news cycle adding to levels of fear and concerns about the global economy and political environment, it can be difficult to watch your investments decline and wonder what you should do next. Emotion can play a strong role in any decision we make. When it comes to money, it can play an even stronger role. The investment mantra states to “sell high and buy low” but unfortunately a large number of investors follow the manias and panics that hit the markets at times and do the exact opposite. Those manias and panics can move markets quickly in both directions. The advent of computer-aided trading and investment algorithms used by large institutional investors also make it difficult for individual investors to act in a timely manner. But timing isn’t everything and, ultimately, it is really about acting in a prudent manner when market volatility hits. By asking yourself these three questions, and focusing on those three things you and your advisor can control, it can help take away some of the emotion that can get the best of us when markets are volatile. 1. How much time can you let your money work before you need to use it? Time is your biggest ally when you invest. The more time you have to let your money work, the more risk you are able to take. That doesn’t mean you should take big risks with your investments. What it does mean is that you have time to let market cycles work themselves out. Markets tend to run in 7-10-year cycles. A bull market is usually followed by a bear market, but can also have corrections and sideways periods in a longer bull run. The one truth is, you only know a bear market when it has already happened. By understanding that some of your investments have shorter time horizons, while other investments have longer time horizons, you can decide how much risk you should take when putting your money to work. If you need to use some of your money within a year, you should keep it as risk free as possible since you do not have the time to let an event in the bond or stock market correct itself. If you have money needed in one to five years, it should usually be allocated to bonds or fixed income. Funds you can let work for five years or more, you can put to work in high-quality stocks as you can give them more time to recover from stock market events. 2. What is the amount of risk you are comfortable taking and the realistic return that you can expect from your money? A simple fact is that 95 per cent of your investment performance is determined by what is known as asset allocation. Asset allocation is the mix you have in your investment portfolio between cash, bonds (fixed income) and stocks (equities). There are other asset classes but these are seen as the primary ones. The other five per cent can be influenced by market timing, geographical or industry exposure or weighting, but they have a minimal impact on long-term performance. Rebalancing to your long-term asset allocation is key. Your asset allocation is usually determined by going through a risk questionnaire to determine your investment risk tolerance. A conservative asset allocation is usually all or mostly fixed income. The most conservative would be all GICs. That being said, there is a lower rate of return with being in all GICs. If you expected anything greater than that, your expectations would be out of line with your asset allocation. The most important element of your return expectation is that it matches the reality of your asset allocation. Your advisor can show you the performance history of different asset allocations as it relates to your risk tolerance. 3. What are the actual investments being used to build my investment portfolio? This question addresses the issue of investment selection and diversification. Not all bonds and stocks are equal. Credit quality and duration have an impact on bond performance. GICs perform differently than corporate bonds. A small-cap stock is different from a large-cap, blue-chip stock. Having too much exposure in one industry can boost returns one moment and add to losses another. Having all your stock exposure in Canada (which makes up only three per cent of the global economy) may not be the best approach to a growing global economy. A value approach to stock investing may be more in favour one year while a growth style is in favour the next. Diversification is key to success but there is no magic bullet in doing so. When it comes to the market, we can’t control the effects of government policy, interest rates, trade tariffs, oil prices, gold prices, political conflict and war. When markets get volatile the main thing is to focus on what you and your advisor can control. If you are able to do that then it usually works out in your favour over the long term. A. Craig Elder, CFP, FMA, CIM, FCSI, is a Vice-President, Portfolio Manager and Wealth Advisor with RBC Dominion Securities Inc. in Medicine Hat. RBC Dominion Securities is a member of the Canadian Investor Protection Fund. This article is for information purposes only. Please consult with a professional advisor before taking any action based on information in this article. For more information on this and other financial strategies, contact Craig at 403-504-2723. 24-23
