Take Emotions out of the Investment Equation

Investing involves risk. But a well-constructed financial security plan contains structural elements specifically designed to address potential risks while focusing on long-term growth. This approach relies on formulas, not emotions.

The foundation for creating a sound financial security plan is determining your risk tolerance. Financial security advisors and investment representatives require you to fill out questionnaires that estimate willingness to accept risk while exploring your financial objectives. The key is finding the right balance – and understanding this process is vital. That’s why emotions need to be taken out of the investment equation.

Why it’s important to start investing at a young age

Time is a powerful tool in reducing risk and an important reason to start investing early in life. Generally, the younger you are, the more aggressive you can be. As you get older, your portfolio should steadily shift to more conservative investing. This is a mathematical process.

Financial markets, especially stock (or equity) markets, can bounce around from day to day and sometimes they take sharp drops. Historically, markets recover over time, albeit with some short-term volatility.

  • The foundation for creating a sound financial security plan is determining your risk tolerance.

The value of mixing it up

Diversification is a bedrock technique for mitigating risk. Holding a large number of investments and types of investments can help lower the overall impact if a particular investment gets into trouble.

Take stocks: Owning shares in several companies spreads out risk. Moreover, you can offset the stocks of newer companies with those of more established companies. Low-risk investors may be willing to invest in a couple of higher risk technology start-ups with growth potential if the rest of their equity portfolio contains larger, more established companies.

Size isn’t the only factor. Investing in different industries adds another layer of diversification. If energy companies are facing short-term problems because a warmer winter is causing natural gas prices to fall, companies in other sectors may benefit from the drop. Investing in different countries is another way to diversify your portfolio.

Mutual funds and segregated funds are common solutions for diversification. They contain shares from a large number of publicly traded companies and may specialize in specific industries or countries. Funds available cover the gamut of risk, from high-risk emerging markets growth funds to conservative funds.

Investment Emotions

Using diversification to your advantage

Asset allocation is another powerful diversification technique. Financial portfolios are divided into three main categories: equities, fixed income (which includes bonds) and cash. Fixed income investments offer less upside but they are generally more stable; this is especially the case when it comes to government or high-quality corporate bonds. Many people invest in bonds indirectly through mutual funds.

Cash is the third category. Cash or cash-like instruments, such as term deposits, offer limited but guaranteed growth. Individuals with a very low risk tolerance – such as people nearing retirement – may hold a significant amount of their portfolio in cash. Cash also offers a safe way to park money for shorter-term goals, such as saving to buy a house.

The financial challenges of getting older

As you age, your investment horizon shortens. At age 25, you have the ability to assume more risk in your portfolio. You can’t rely on time to smooth out bumps once you approach retirement. As a result, your portfolio should gradually become more focused on conserving capital and generating income. That means moving to less aggressive investments and eventually increasing your holdings of fixed income investments and cash.

Why it’s important to ignore irrational urges

Even if you have the best-laid plans in place, investors can find themselves tempted to try something new. Common missteps include:

  • Trying to time the market: Professionals can’t know when prices will go up and down and neither can you.
  • Selling when an investment falls in value: In actual fact, this could be the time to buy.
  • Chasing hot rumours. Best tip ever? Develop a solid financial security plan and stick to it.

Going on autopilot with the right investment plan

If your investment portfolio is set up properly, it should almost take care of itself over the long term. Contributions can be transferred automatically and proceeds, such as dividends, are reinvested.

Thoroughly examine your overall investments once or twice a year to make sure asset allocations remain at desired levels. A jump in stock prices can be good for the portfolio but you may find yourself overly invested in equities and needing to move some of the money into more conservative investment options.

Spending time working with me to customize – and fully understand – a sound financial security plan allows you to spend less time thinking about money. It’s a big part of enjoying financial independence.

Good Savings Habits Lead to Financial Independence

Regardless of what you’re saving for – a down payment on a home, a dream vacation, a child’s education or your eventual retirement – developing good saving habits can definitely pay off. Even relatively small but regular contributions can quickly gain momentum thanks to the power of compounding, or making interest on your interest.

Most people can rationalize buying new bedroom furniture or a better and more reliable car by using small monthly payments spread over several years. However, you can also use this strategy to build hefty savings.

For some, saving is instinctive. Chipmunks know they must save enough nuts and seeds to get them through the winter. They even build storage rooms in their burrows.

But it’s important everyone – even humans – realize the importance of saving.

Good Savings Habits

Deciding on your goals for the future

The first step is determining an investment strategy and that means carefully evaluating your financial goals. After all, saving for a down payment on a house or a new car requires a different approach than long-term retirement planning.

So, ask yourself this: what do you want to do with your money?

Crunching the numbers

Next, set up a spending plan to help you determine how much you can afford to put away each month. Plenty of online tools can help you.

Start by going over your chequing and savings accounts and credit card statements, including ATM withdrawals. Make sure to include everything – even those pricey takeout lunches. This exercise can help you trim excessive spending.

  • Setting up a regular, automatic savings plan is an essential part of anyone’s financial health.

Once you have a better understanding of your income and expenses, determine your savings “payment.” Be bold, as you can always dial it back a bit later on. Or better yet, keep the amount steady and reduce your overall spending. Then, as your income grows, continue to raise the amount you put away each week.

Choosing the right investment solution

I can help you choose the right mix of investments and help you achieve your unique savings goals. Find out more about the features and benefits of various investment solutions.

Why it’s crucial to start saving now

Setting up a regular, automatic savings plan is an essential part of anyone’s financial health. The sooner you start, the better off you’ll be and the sooner you’ll achieve your goals.

Pay Yourself First

You know it’s important to set money aside to reach your investment goals. However, with so many spending opportunities vying for your attention, it can be tough to fit savings into your financial security plan.

  • Paying yourself first means saving a set amount first and only spending what’s left over – rather than the other way around.

“ Pay yourself first ” means saving a set amount first and only spending what’s left over – rather than the other way around. It means making your financial goals a priority by treating saving like any other bill or re-occurring payment.

That’s where a pre-authorized contribution (PAC) plan can help. It allows you to transfer funds automatically from your bank account to your plan.

Pay Yourself First

Instead of saving to invest in one lump sum, PACs spread your saving over regular intervals, helping you balance the effects of up and down market cycles.

Making small, regular contributions can go a long way to helping you achieve your financial goals. For example, if you invest $100 a week for your retirement, you’ll have accumulated $197,000 after 20 years – assuming a fixed interest rate of six per cent.1

Pre-authorized contribution plans make it easier to save for your future. I can work with you to determine which PAC options and schedules work best for you.

Asset Allocation the Key Investment Strategy

Landing on the right investment strategy boils down to balancing your expectations for growth with your tolerance for taking risks. But even the most aggressive portfolio should gradually take on a more conservative approach as retirement age approaches.

An investment portfolio may contain many types of investments, all of which fall into three main categories.

Risk versus reward

Stocks, or equities, offer the biggest upside for increasing in value. However, it can be a bumpy ride. Short-term dips in the stock market can be steep. Over time, however, the long-term trend is up. Fast and scary price drops in share prices become mere blips over 20 or 30 years.

Risk varies greatly within this category. Some equity-based mutual funds clearly identify themselves as growth funds, taking on more risk in an attempt to find companies with the highest potential. At the other end, some mutual funds aren’t shy about calling themselves conservative. Their holdings focus on well-established companies with solid fundamentals. The potential isn’t as high but investors face lower risks.

Middle ground

Bonds, or bond-based mutual funds, find a home in most portfolios. They’re inherently less volatile – well suited for protecting principals – but offer limited rewards. They’re classified as fixed-income instruments because owners receive regular payouts, which can also be re-invested.

As with equities, growth potential and risk varies widely within this segment. Government bond funds offer quite low risks but returns are also limited. Corporate bonds have greater potential and more risk. Investors comfortable with risk may opt for high-yield, or “junk,” bonds issued by fledgling or distressed companies looking to raise capital by offering high but uncertain yields.

Cold cash

Cash, savings accounts, guaranteed investment certificates and money market funds are the safe haven in a portfolio. The risk of losing your principal is extremely low. Many of these investments are guaranteed and losses in the others are rare.

The biggest risk in parking money in cash is inflation. If the inflation rate is higher than your return, you’re losing money in real terms. However, for people already retired, cash is an important category.


Balancing act

My prime objective is to recommend an asset allocation that makes sense for your situation, including age, need for returns and tolerance for risk. Model investment strategies run the gamut of aggressive growth (all stocks) to ultraconservative (all fixed-income securities such as bonds, as well as cash vehicles).

Willingness to take on risk varies greatly. Some people are very comfortable with risk while others shy away from the stock market completely. This risk profile is a central element in designing the best asset allocation.

  • A 20 – something person may be more risk averse than a retiree but a longer horizon gives a young person the ability to take on more risk.

Beyond risk

Younger investors have a greater capacity to take on risk since their investment window can be 30 years or longer. Indeed, a 20-something person may be more risk averse than a retiree but a longer horizon gives a young person the ability to take on more risk. As a result, a large share of their holdings may be in equities.

Conversely, retirees who fly to Las Vegas twice a year may have little choice but to hold most of their investments in bonds and other fixed-income instruments to both generate income and preserve their capital.

Thus, for any given willingness to take on risk, a portfolio should start shifting to a more conservative approach as retirement approaches.

Needs-based decisions

Asset allocation is also a function of need. I can play a central role in helping determine the amount of savings you’ll need to support your lifestyle in retirement. Many factors may come into play, such as your willingness to downsize your home or expected inheritances.

First, the good news

Canadians, on average, are living longer. Statistics Canada reported in 2014 that a 65-year-old woman should expect to reach 87, up two years from 2001. A 65-year-old man today can expect to live to 85, also up two years.1

Longer retirements may require more savings. This increase in need could require that you incur more market risk.

Custom tailoring

Successful investing does involve some risk. I will assess your individual situation and help you design the optimal asset allocation to meet your goals, and help it evolve over time while staying in your comfort zone.

As you get closer to retirement, proper planning can help ensure the risk built into your portfolio will steadily diminish, leaving you free to start planning the next chapter in your life.

CRM 2: How Do Financial Advisors Get Paid?

Mutual fund investing. There’s a fee for that?

A management expense ratio (MER) is the total* fee you will pay to invest in a standard series mutual fund. It’s important to note that you do not pay the MER directly; rather it’s paid by the fund itself, which reduces the value of your investment accordingly.

How your money gets split out in an MER

You invest $10,000 in a standard series of a typical Canadian balanced fund with an MER of 2.5 per cent. Through the fund you pay a total of $250 in fees for the year, which may be broken out as follows.

  • $121 for the professional management of the fund and fund operating expenses
  • $29 for taxes
  • $100 for administration, compliance and oversight provided by the fund dealer, of which, on average in the industry, $80 goes towards investment representatives for the services provided to clients, including financial advice, and operating and overhead expenses incurred by the firms while providing those services


*Additional sales charges may apply, as agreed upon between the client and the financial security advisor. Illustration assumes a front-end load structure, with a zero per cent sales charge and a blended tax rate of 13 per cent. A fund’s tax rate may vary as it is a blended tax rate calculated based on the mix of investors invested in that particular fund across all provinces. Additional fees and charges may apply depending on the series and options chosen.

Realizing the value of the right advice

It shouldn’t be surprising that 81 per cent of fund investors have confidence in mutual funds as an investment solution.*

I can offer you choice, flexibility and the comfort of knowing you’re invested in a product that is aligned with your individual goals and aspirations.

Offering the right mix of strategically selected assets is at the centre of every strong portfolio.

Because your investment is managed by experts who follow this principle and manage costs and risks through me, you have access to strong products and solutions that you would otherwise not have access to on your own.

Contact me to review your investment needs or start your planning process.

*IFIC/Pollara, Canadian investors’ perceptions of mutual funds and the mutual fund industry 2013