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Good or bad investment?

19 September 2017 by National Bank
good or bad investment

Saving can seem complicated. How can you get the most out of your investments? How can you tell the difference between a good investment and a bad one? Advice from financial planner Natalia Sandjian.

Do you need a lot of money to invest?

You can start investing as soon as you can free up as little as $25 in your monthly budget. It’s false to believe that you need to have more than that for investing to be worthwhile.

There are so many financial products out there, it’s easy to get lost…

Guaranteed Investment Certificate (GIC), high interest savings account, principal-protected investments, investment funds, managed solutions… There are so many options and they aren’t always well-understood.

That’s where a financial advisor comes in, to guide their clients through this universe.

What constitutes a bad investment, for you?

An investment that doesn’t respect your investor profile, in particular your tolerance to risk, is definitely going to be a bad investment.

The potential fluctuations of a too-risky investment creates stress and volatility that could hinder an investor’s short-term goals. As for the consequences of an investment that’s too conservative, they can be summed up by two things: a high opportunity cost, and the accelerated erosion of your purchasing power due to inflation. Putting up with a scant 2% return without considering the timeframe of an investment, for example, is a mistake. What’s more, if the return of  your investments doesn’t succeed in compensating for the increase in cost of living, the sustainability of your capital over time is at risk… and outliving your capital is definitely the last thing any investor hopes for.

Even worse than a bad investment made in isolation: inadequate diversification.

This is a mistake to avoid at all costs! We’ve all heard the expression “don’t put all your eggs in one basket.” However, good diversification doesn’t mean that your investments are spread out among several financial institutions, but rather that your investments are placed in diverse types of investment products. What every investor needs to research is an optimal combination of asset categories, industries, geographic regions and even management styles.

In terms of returns, do investors have realistic expectations?

Absolutely not! People seem to be holding onto performance expectations from the past – 15% or even 20% on GICs, for example – while simultaneously forgetting the economic context of that time, which was that mortgage rates were at 25% and inflation was high.

In general, people with a balanced profile today can expect returns reaching highs of 11%, while the norm is a net return of about 5%.

Do emotions too often trump rationality?

Emotions are important, because they serve as indicators for tolerance to risk. It’s all fine and well for a client to say, on paper, that they’re comfortable with the volatility of their portfolio, but if in practice they make a panicked phone call to their advisor every time the market dips, it might be time to review their profile.

The emotional factor might also hinder a client’s ability to manage their investments.

As a financial planner, we often play the role of the filter between the client and their emotions – a neutral, more rational intermediary – in order to avoid, for example, the premature sale of a dropping stock.

Do people only speak to a financial planner when their portfolio is “sick”?

Unfortunately, that’s often the case. People come to see us when their finances are going poorly, when they are worried about their debts or when they’ve tried unsuccessfully to invest on their own. They don’t always have the reflex to bring us into their happy projects, like for example the arrival of a new baby, which can still have a serious financial impact.

In financial health, as in physical health, prevention is the best remedy.

What can financial planners do with my investment portfolio?

They hold all the cards to develop an investment strategy adapted to the needs of their clients. Their expertise permits them to provide guidance on retirement planning, estates and personal finance, all while taking into consideration the tax, legal and insurance implications. In addition to planning, they also offer support. It’s a relationship that goes far beyond simple transactions.

Investment: 3 classic mistakes

Confusing dispersion with diversification

Spreading your investments among several financial institutions has nothing to do with diversification (which involves opting for different investment categories: fixed income securities, stocks or geographic regions): this is called dispersion. It’s possible to do all your investing through a single institution and still benefit from a diversified portfolio.

Improvising your way through online investing

There are three things you need to be a good do-it-yourself investor: investment knowledge, the time to devote and a strong and consistent interest in managing your portfolio, something which might be exciting at the beginning, but can get tiresome over time. Although it’s very accessible, it’s important to know what you’re getting into before jumping into online investing.

Investing outside of your profile

Or worse – not knowing what your profile is! Your investment profile is critical to ensuring good asset allocation. Many first-time investors would benefit from the support of a financial planner when they’re filling out the questionnaire to determine their profile. It’s their role to verify the comprehension, consistency and coherence of investors’ responses.

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