Tag Archives: investing

Rattled by the “Correction?” Diversification keeps your nest egg on the rails

Posted By |

“I know not what the future holds, but I know who holds the future.”
—Homer

We are all aware that portfolio winners rotate position from time to time. Leaders have a habit of becoming laggards. “Must own” darlings become “forgotten” names. Winners vacate the “winner’s circle.” As the timeless saying preaches, don’t put all your eggs in the same basket. Hopefully, this classic advice is being followed.

“Diversification strategies are essential, time-tested tools for every nest egg.”

The main goal of investment diversification is to contain the damages of market volatility from being inflicted on the nest egg. The importance of this is fundamental and always in fashion. I highlight some key observations on portfolio diversification:

  • Investment portfolios suffer from inadequate diversification.
  • Mutual funds we own often have the same, or similar, stocks.
  • Investors are not aware that they lack diversification.

Diversification strategies are essential, time-tested tools for every nest egg. They improve your chances of achieving better consistency of long-term returns. It’s a focus for every investor to prioritize.

Basic diversification involves spreading your risks across different sectors of the economy. All within the asset allocation targets set by your investment plan of action. Make sure that you are comfortable with the approach so that you don’t have to dwell on regrets. Portfolios I review range from too concentrated to well over diversified.

Overall, diversification is a necessary safeguard. You don’t want problems arising in any asset class to ruin your well-designed portfolio. Especially the one that delivers the family’s retirement cash flow.

Develop sound habits

Diversification increases the odds of you being right more often than wrong. When some selections are suffering, others can step up and help cushion the rest of the portfolio.

Make it your habit to keep your nest egg from slipping off the rails. I summarize my top ways to achieve necessary portfolio diversification:

  • Asset Classes: Choosing different asset classes for the game plan is a sensible and prudent step. Stocks, bonds, cash, commodities and real estate are common picks.
  • Economic Regions: Portfolios may include selections from Canada and other regions around the world. Like the USA, Europe, Far East and emerging countries.
  • Time to Maturity: A portion of the portfolio could have a range of investment maturities. From as short as 30 days to as long as 30 years.
  • Foreign Currencies: Investment selections can be purchased in currencies other than Canadian funds. Such as US dollars, the Euro or hedged to our Loonie.
  • Investment Quality: High investment quality trumps reaching out for questionable yield. Trading quality for higher yields increases the potential to incur large losses.

Portfolios ought to contain a variety of investments that don’t all move in unison. However, seasoned investors know full well that is not always possible.

Broad brush

My table below is far from scientific. Look upon it as a broad brush view of portfolios that own Exchange Traded Funds (ETFs) and/or mutual funds as their primary investments in equities. Each investment selection is referenced as a “basket.” I divide the diversification landscape into three ballparks. Continue Reading…

3 rookie mistakes that seasoned investors still make

Posted By |

By Neville Joanes

(Sponsor Content)

We’ve all been enjoying the bull market. But getting a historically respectable 6 per cent return, or even doubling it, can feel underwhelming when the economy is roaring ahead and the Nasdaq has gone up 30 per cent.  From what I see, the difference between the big winners and the also-ran-investors often comes down to whether or not they let their biases cloud their judgement. Even experienced investors are not immune.

It’s such a big problem that an entire field of study has sprouted out of this: behavioral economics. Economist Richard Thaler won a Nobel prize for his work looking at how these biases operate among humans in a supposedly rational market.

Here’s a roundup of the worst mistakes I see again and again from DIY investors (which is why a lot of these people would be better off with a set-it-and-forget-it strategy).

Running with the herd

If you want an above-average return, then don’t rush into what the crowd is doing.

Probably the most outrageous example of this mistake is to be found in the irrational exuberance over Bitcoin. Just $1,000 worth of Bitcoin from a few years ago would be over $1 million today. If you threw caution to the wind and invested in this years ago, then you have certainly seen the kind of ROI that Wall Street hedge fund managers can only dream of. But all those gains are in the past, to the benefit of the early adopters.

The vast majority of investors have arrived late to this party. Most of the large gains have already been captured. And while there may be more growth yet to come, experts say that Bitcoin eventually seems destined to repeat its bust cycles of 2011 and 2014. The herd is about to race off a cliff. Usually, by the time your neighbor next door is jumping on the bandwagon, it’s already past time to get off.

Recency bias

We all know that past performance is no guarantee of future returns. And yet, it is basically human nature to ignore that knowledge.

In life, recency bias is actually a useful rule of thumb a lot of the time. Your friend who always shows up late will show up late again. The restaurant you liked years ago, but whose quality keeps declining will continue to suck, in new and intolerable ways.

For investing, recency bias can really do harm. We see a line graph showing a steadily-rising return, like with the Nasdaq: well, why wouldn’t that trend continue? Because it can’t. Over time, as an asset rises in value, we can expect it to fall back down to the mean.

Continue Reading…

5 sensible steps to improve your 2018 game plan

Posted By |
“Your future depends on many things, but mostly on you.”
—Frank Tyger (1929–2011), cartoonist, columnist and humourist

Designing the investment plan for the long haul requires much serious thought. Unfortunately, investors shortchange themselves on two fronts. Firstly, they spend far too much time selecting investments. Secondly, and more important, they spend too little time researching and establishing their investment policies and strategies. The ones that the plans should put into effect to reach personal goals.

In my experience, few investors actually have a sensible game plan that is being followed. Too often, this results in a collection of “flavour of the day” investment selections. Designing the appropriate investment plan is essential, particularly the asset mix targets.

“Understanding the major investment risk factors brings perspective to the plan. The ability, willingness and need to take risks are your top three.”

Happily, this situation is easy to rectify. A new year is about to make its grand entrance. Let us take a breather to contemplate a few improvements.

Stewarding the finances is truly a long journey. If you were my client, I would start with this question, “What is important about investing to your family in 2018 and beyond?”

My observation is that many investors opt for preservation of capital. Others focus on portfolio growth. The rest concentrate on the retirement income stream. Lifestyle needs are also high on the pecking order.

I touch on a handful of key steps in designing your game plan:

1.) Retirement prospects

Determine the family’s desired retirement income goal in today’s dollars. Calculate the size of portfolio to reach and sustain the goal. This provides portfolio direction and purpose. Estimate the personal rate of return required to achieve the retirement nest egg ballpark. Then treat that rate of return as the “investment benchmark” for the game plan.

Once the personal rate of return is identified, there is likely no need to incur higher investment risk than necessary. This is especially important to retired investors. Consider all the investment accounts owned as part of the big picture, not in isolation. Revisiting your “asset location” best practices helps fine tune the game plan.

2.) Investor profile

Analyze which type of investor profile suits and feels best. The most familiar ones are labeled as preservation, income, balanced, growth and aggressive. In my experience, investor profiles change infrequently.

The majority of investors are comfortable within 40% to 60% allocated to stocks and the remainder to cash and bond selections. For example, a balanced profile typically allocates about 50% to stocks, 40% to bonds and 10% to cash instruments.

3.) Asset mix 

Asset mix decisions have the greatest impact on portfolio outcomes than any other factor. Studies show that these decisions explain a substantial amount of variations in total portfolio returns. Continue Reading…

10 financial lessons to share with friends

Posted By |

The personal finance community can be a bit of an echo chamber, reinforcing and repeating the same ideas on how to save, invest, and spend our money. This sort of tribalism can be intimidating for outsiders who are eager to learn but afraid to ask questions or know where to start, especially when it comes to more complicated topics.

The truth is not all Canadians are financially savvy. In fact, a Tangerine survey last year found that only half of Canadians consider themselves knowledgeable when it comes to personal finances.

As personal finance enthusiasts it’s our duty to move beyond this little corner of the Internet and start talking to our friends and family about money.

It’s not easy to talk in real-life about what we do with money, how much we save, how much we spend, and the foolish mistakes we make. But these are crucial conversations to help each other deal with money and the complex decisions about it that we all face.

We can start by sharing the kinds of tips and tricks that helped us build lifelong financial habits and skills. It’s what financial literacy is all about, right?

That’s why I was excited to partner with Tangerine for Financial Literacy Month and list my top 10 financial lessons to share with friends:

1.) Avoid credit card debt like the plague

It’s impossible to go through life without incurring at least some debt. I’ve had student loans, credit card debt, a car loan, line of credit, and finally a mortgage.

Carrying a balance on my credit card was by far the most harmful to my finances. Making the minimum monthly payment hardly puts a dent into the balance, and 19 percent interest ensures that balance will continue to grow.

Tackle it with the debt avalanche or debt snowball method, and once it’s gone commit to never again paying one cent of credit card interest.

2.) Track your spending

To free up that additional cash flow you need to understand how much money comes in and how much goes out every month. There’s no other way around it – how else will you know what you can afford to save?

Whether you use a mobile app, budgeting tool, or good old-fashioned Excel spreadsheet, the point is to track every transaction until you can glean some insight into how you spend your money. Use this information to make informed decisions on which areas of your budget you can cut, and where you’d like to direct any additional savings.

Related: Track your habits, save money

3.) Automate your savings

The key to building a life-long habit of saving is to make your contributions automatic and as painless as possible. Pick a day that coincides with your paycheque and set up an automatic transfer into your RRSP, TFSA, savings account, or RESP.

It’s called paying yourself first. Start with as little as $25 and increase it annually, or as your budget allows. This powerful strategy works because it treats your savings goals as ‘mortgage-like’ fixed expenses that come out of your account on a specific day.

4.) Save a percentage of your income

One rule of thumb suggests saving 10 percent of your take home pay for retirement. I say save a percentage – any percentage – of your income as long as you start with something and make it automatic.

One cool trick I learned was to bump up that percentage in tandem with a salary increase each year. So, for example, let’s say you earn $50,000 and saved 5 percent of that amount ($2,500). Then you get a 4 percent raise in the New Year, so now you make $52,000. Well, don’t just continue saving $2,500 – bump that up to $2,600 to stay in-line with your 5 percent savings rate. Continue Reading…

Do men and women have different Savings Habits?

Posted By |

By Danielle Kubes

Special to the Financial Independence Hub

In an online survey about savings habits, financial comparison site Ratehub.ca reports that although Canadian men and women save almost the same amount of money, men have a greater level of confidence in their financial planning.

Inspired by 2014 Statistics Canada data that says Canadian women have lower financial literacy scores than men and were less likely to consider themselves “financially knowledgeable” (31% of women versus 43% of men), Ratehub.ca set out to discover if there truly is a gender divide. 

The company digitally surveyed a random sample of 1,087 Canadians in November, with respondents self-identifying their gender.

“Our survey revealed that while men and women differ in aspects of their financial planning, at the core, their personal finance goals and concerns are nearly identical,” the report says.

Both genders have similar financial goals

Indeed, both genders report almost the exact same financial goals. At the top of list of priorities is retirement, followed by travel and then having an emergency fund.

Both men and women prefer to save and invest in registered accounts, especially the registered retirement savings plan (RRSP) and tax-free savings account (TFSA). What they choose to invest in within these accounts — guaranteed income certificates (GICs), exchange traded funds (ETFs), stocks, or other products — is unknown.

Yet men and women diverge most in how confident they are that they’ll have enough money to retire: less than half of women, 41%, say they’re confident compared to over half of men surveyed, at 56%.

Odd, because both genders save almost the same amount of their salaries, with women saving 26% and men 29%.

The gap could potentially be explained in how able they are to grow those savings through investing. Eighty-five per cent of men invest their money, while only 76% of women do.

Of those that do invest, less women than men self-manage their investments, potentially indicating another worrisome lack of confidence in their financial knowledge.

This is supported by the original Statistics Canada data, which found women were less likely to state they “know enough about investments to choose the right ones that are suitable for their circumstances.”

Confidence doesn’t mean financial knowledge

But does confidence translate to actual financial knowledge? Apparently not. When Statistics Canada quizzed Canadians who rated themselves financially literate, one in every three women failed, while one in every four men failed. Continue Reading…