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What is a bad investment?

14 January 2016 by National Bank
Good or bad investment?

Saving isn’t always easy. Canadians just barely managed to set aside 4.9% of their income in 2014. So how can you make the most of your money? Here are some tips from Natalia Sandjian, National Bank financial planner.

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Do you need a lot of money to invest?

You can start investing as soon as you can set aside $25 of your monthly budget. It’s wrong to think that you need a lot of money for it to be worth it. Or worse, that you need to pay back your debt before thinking of investing.

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

Guaranteed Investment Certificates (GICs), high-interest savings accounts, principal-protected investments, mutual funds, managed solutions… There are a lot of options that investors don’t always know about.

It’s the financial planner’s job to guide clients through the world of investing.

What do you consider to be a bad investment?

An investment that is not in line with your investor profile, particularly your risk tolerance, is definitely a bad investment.

The potential fluctuations of an investment that is too risky can create stress and volatility that can harm your short-term investment objectives. As for the consequences of an investment that is too conservative, they can be summed up with these two concepts: a high opportunity cost and a faster loss of purchasing power due to inflation. Making do with a slim 2% return without considering the investment horizon, for example, is a mistake. In addition, if the return on investment doesn’t make up for the increase in your cost of living, the capital’s life span is at risk… and outliving your capital is certainly the last thing that any investor wants.

What’s worse than just a bad investment? A lack of diversification, which does the most damage. We’ve all heard the expression “don’t put all of your eggs in one basket.” Diversifying your investments does not mean scattering them between several financial institutions. Rather, it means investing your assets in various types of investment products! Each investor should look for different types of investments, such as Guaranteed Investment Certificates (GICs) and stocks, both in Canadian and international markets.

In terms of returns, do investors have realistic expectations?

Absolutely not! People seem to expect their returns to be the same as in the past – from 15% to 20% on GICs, for example – while ignoring the current economic climate of 25% mortgage rates and high inflation.

In general, people who have a balanced profile expect returns around 11%, while it is standard for net returns to top out at 5%.

Does reason take a back seat to emotions too often?

Emotions are important, because they are a good indicator of risk tolerance. It’s all well and good when a client is comfortable with a volatile portfolio on paper, but if he leaves a panicked voicemail for his advisor every time there’s a regular dip in the market, it might be a good idea to update his profile.

The emotional factor can also make it difficult for clients to manage their investments. Financial planners often act as more rational, neutral intermediaries, to mediate clients’ emotions and avoid impulsively selling an investment during a downturn, for example.

Do people only see financial planners when their portfolio is “under the weather”?

Unfortunately, this is often the case. People come to see us when their finances aren’t doing well, when they are concerned about their level of debt or if they’ve tried to invest on their own, without success. They don’t automatically think to come see us when there are positive developments in their lives, like the birth of a child. This is unfortunate, because these events have significant financial impacts.

In financial health, an ounce of prevention is worth a pound of cure.

How can a financial planner help with my investment portfolio?

Financial planners have everything they need to develop an investment strategy tailored to their clients’ needs. Thanks to their expertise, they can help clients with retirement and estate planning and personal finance, all while considering the fiscal, legal and insurance aspects. Beyond planning, they also provide support and guidance. This relationship goes much farther than simple transactions.

Investments: three classic mistakes

  • Scattering your investments instead of diversifying them

Investing with different banks has nothing to do with diversification (which involves opting for different types of investment products). It just scatters your investments. It’s possible to invest all of your money with a single financial institution and take advantage of a diversified portfolio.

  • Not investing according to your profile

Or worse: not knowing it! Your investor profile is critical for good asset allocation. For many new investors, it’s a good idea to fill out the investor profile questionnaire with the help of a financial planner. It’s their job to make sure that clients understand, and that answers are consistent and coherent.

  • Winging it as an independent investor

You need three things to be a good independent investor: solid investment knowledge, time and definite and sustained interest in managing your portfolio. This can be exciting at the beginning, but can become a burdensome task over time. In practice, very few people fit this profile.

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The opinions in this article are those of the person interviewed. They do not necessarily reflect the opinions of National Bank or its subsidiaries. For any advice concerning your or your business’ finances, please consult your financial advisor or another professional as necessary (accountant, tax expert, lawyer, etc.).

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