SEMINAR - FEB 9, 2006

Click here to return to the Seminars page.

Here are some highlights from the last meeting……

DIVERSIFIED PORTFOLIO’S – appealing in turbulent times.

Recent market turbulence has Canadian investors looking for ways to protect their investments from dramatic ups and downs. Many have turned to asset allocation mutual funds, all-in-one portfolios that mix asset classes and management styles. This built-in diversification cushions investors from volatility, because while one fund holding might be underperforming, another will almost certainly be benefiting from exactly the same circumstances. For example, bonds generally perform well when equities are struggling. Small cap stocks usually do well when large cap stocks are floundering. The “value” management strategy tends to outperform when the “growth” strategy stumbles. Clearly, a fund that combines different types of investments won’t fall as far as a fund that is narrowly focused on one type of holding. Diversifying assets is, however, just the beginning of the asset allocation fund manager’s job. One of the most important benefits of these investments is that holdings are selected to efficiently diversify assets. “The idea of an efficient portfolio is that you’re going to get the most returns for the amount of risk that you take. “Efficient frontier modeling,” which optimizes performance while minimizing volatility. People became very, very confident about the stock market and now they’ve been reawakened to the risks that may lie there,” he says. “That’s where the appeal of a diversified portfolio comes from. It’s principally a way to manage risk, and maybe the best way to put it is, it’s the way to match the risk of the portfolio you have to your own tolerance or appetite for risk.”

Asset allocation funds are strong core holdings and are appropriate for conservative, balanced and aggressive investors. After all, why would you want to expose your investments to any more risk than is absolutely necessary? 

Why You Should Diversify
Let's say that investor X has a portfolio of only airline stocks. If it were publicly announced that airline pilots are going on an indefinite strike and that all flights are cancelled, share prices of airline stocks would drop. Investor X's portfolio would witness a noticeable drop in value. If, however, investor X counter balances the airline-industry stocks with a couple of railway stocks, only part of the portfolio would be affected. In fact, there is a good chance that the railway stocks' price will climb as passengers turn to trains as an alternative form of transportation.
To take this a step further, there are many risks that affect both rail and air because each is involved in transportation. Any event that reduces travel hurts both companies. (Statisticians would say that the stocks have a strong correlation.) A superior way of diversifying is to diversify among companies in different industries. The more uncorrelated two stocks are the better.
Unfortunately, as the world has recently learned from cases such as Enron and WorldCom, even the best analyses of the most worthy investment houses cannot protect investors from a losing investment. Diversification won't prevent a loss, but it can reduce the impact of fraud and bad information on one's portfolio.

Investment knowledge and skills can be outdated very quickly. Sophisticated institutional tools and knowledge based systems eliminate the level playing field for the novice investor. Most investors – put their trust in someone like myself – who looks at the whole financial picture or a mutual fund specialist, or a stock broker. But for some people this is not the answer. Do you have what it takes to make buy and sell decisions at the appropriate time?

As yourself these 3 questions:

1. Do you have 3 or 4 hours a day to read and research information and data about companies?

2. Do you have the training and knowledge about the stock market and other investment issues? Every decision is made in a gray area – there is never a black & white – if it was easy we all would be doing it.

 3. Do you have large amounts to invest – usually $5000 is the minimum or more?

90% of investors should consider professional money management.

If you answered no to one or all of the above then I can help in establishing your goals, and give you the assistance to implement your plan for you.

How can Asset Allocation portfolios save you time and allow you to “sleep at night”?

• Taking care of ongoing monitoring so you don’t have to

• Selecting “best in class” asset managers, and ensuring that each asset manager stays true to their investment mandate over time.

• Identifying when an asset manager held within an asset allocation portfolio should be replace and then deciding on the best possible outcome for you.

• Providing high quality investment portfolios that are in line with your tolerance for risk.

COMPOUNDING

The rule of 72 – whatever the interest rate you are getting on your money – divide by 72 and that is how many years….ie 6% would take you 12 years to double your money, if you averaged 10-12 % it would take you 7 years…

Interest accumulating on top of interest. The more traditional way is to send your body out to work. Sending your money out to work can really help ease the pressure.

You work hard for your money – let it take some of the burden.

It is never to late to start – with women‘s life expectancy at age 65 is 20 years - you could still enjoy the benefits of compounding.

DOLLAR COST AVERAGING

Wayne Gretzky once said, “You will always miss 100% of the shots you don’t take.” Coming from someone who holds more scoring records than any other player in history, that’s pretty good advice. Investors can benefit from this advice as well by using dollar-cost averaging. The idea is to invest on a regular basis rather than just when you think the time is right. By following the principal of dollar-cost averaging you can avoid the pitfalls of market timing. If you don’t invest today in the hopes that you’ll get a better deal tomorrow you may miss the mark altogether. Dollar-cost averaging encourages you to invest consistently based on a schedule that fits your budget. Even a small investment, made regularly, will add up over time. And dollar cost averaging can offer some important advantages. Especially when markets are volatile – and as long as they are generally level or better – a program of regular investing can help you buy low and sell high. By investing the same amount on a regular basis, you are automatically buying more units when prices are low and fewer units when prices are high. The result is that your average cost per unit can actually be lower than the fund in general over the same period.

Markets are inherently volatile, but if the long-term trend is up – even modestly – the dollar cost averaging technique can help you maximize your gains and minimize your losses.

Here are some techniques to help you get started:

Decide how much you want to invest at each interval. Remember, consistency is the key to dollar-cost averaging so make it an amount you can live with for the long term.

Decide how often you want to invest – each month, each quarter, every six months – and make it as automatic as you can. Your advisor can offer advice and help you set this up.

Relax. The whole point of dollar-cost averaging is to let if work for you. Don’t get caught up in the day-to-day fluctuations of the market. Give your money the chance to grow as the economy grows.

INVESTMENT LEVERAGE

Each year more and more Canadians are taking advantage of a simple yet powerful wealth-creation strategy – investment leverage.  Investment leverage, simply put, is borrowing to invest.  Using someone else’s money to achieve your investment goals. 

Investment leverage is similar to a mortgage, a student loan or an RRSP loan.  It is simply borrowing money to purchase investments with the goal of achieving greater wealth. How is leveraged investing different from traditional investing? 

With traditional investing, you set aside a portion of your income each month to purchase investments gradually. 

With leveraged investing, you take out a loan and make a single large investment on day one.  Then, you set aside a portion of your income each month to make interest payments on the loan.  While your monthly payment costs may be the same under both strategies, leveraged investing has the potential to generate far greater returns.

Why does leveraged investing work?  There are two reasons:

First, leverage allows you to make a larger initial contribution than traditional investing does.  The larger amount has a greater potential for compound growth.

Second, the interest payments you make on a leverage loan are generally tax-deductible, which reduces your overall cost of borrowing.

Taken together, the effects of compound returns and tax deductibility greatly increase the likelihood that a leveraged investing strategy will outperform a traditional investing strategy.

Leveraged investing involves more risk than traditional investing.  However, there are a number of things you can do to reduce the risk:

1.       Invest for the long term

The amount of risk involved in leveraging decreases the longer you invest for.  This is because the return of stocks and stock-based investment funds varies widely from year to year.  But these fluctuations tend to even out over the longer term.  Plan to leverage for 10 years or more to reduce the impact of short-term market movements.

2.       Commit to the strategy

Even for long-term investors, short-term market volatility carries the risk of emotional decision-making – selling at the first sign of trouble.  Emotional decision-making can derail an investment strategy before it has time to work.  Keeping your eyes on the long-term results will reduce the risk that you will get cold feet and lock in short-term losses.

3.       Borrow less than you can afford

Since a long-term horizon is key to the success of this strategy, the last thing you want to worry about is being forced to cash out early because you can’t make interest payments.  Start by borrowing less than you can afford so that you can comfortably absorb the bumps that life may throw your way without abandoning your investment strategy.

Leverage isn’t right for everyone.  The best way to decide if it’s right for you is through a discussion with your financial advisor.  Here are some of the things you need to ask yourself and discuss with your advisor:

Do I have a specific financial goal in mind?   Ensure you have a specific goal you’re trying to achieve before starting this investment strategy.

For how long am I planning to invest?  Leverage may be appropriate if you have a long-term horizon of perhaps 10 years or more.

How much other debt am I carrying?  You should ensure you have your current debt load well under control before assuming further debt through leverage.  A good rule of thumb is that your total borrowing cost each month, including the interest you pay on an investment loan, should not exceed 35% of your before-tax income.

How stable is my income?  A relatively stable and predictable income will make it easier to make the required interest payments each month.

What is my tolerance for risk?  Are you comfortable seeing the value of your investment move up and down?  Are you comfortable with the possibility that leverage may not outperform traditional investing? 

If this sounds like a strategy that you might be interested in, give me a call to find out if this strategy is right for you.

12 STRATEGIES FOR ACHIEVING WEALTH

1. Define what wealth means to you – exactly what will it take for you to feel wealthy?

2. Lock that definition firmly in place – don’t keep raising the bar.

3. Make sure your definition is achievable.

4. Create a plan that is achievable.

5. Make it a must for you by listing the reasons you must be wealthy.

6. Finalize your plan and work out the details.

7. Follow through by taking immediate action.

8. Make yourself responsible.

9. Don’t give up when the going gets tough.

10. Make your life a business and expect a year end profit.

11. Don’t let other people’s emotions control or cause you to deviate from your asset allocation.

12. Get good coaching!

There are 3 kinds of people in life….

Those who make things happen….

Those who watch things happen….

Those who say “what happened”?….

Quote from Peter Legge,

“Most of us will not choose how we will die,

but we all choose – everyday – how we will live”

Free will is a beautiful thing yet it comes with responsibility and accountability. The sum of your life rests on your shoulders. Only you can decide your fate through the priorities you set, the decisions you make, the efforts you spend, the sacrifices you make. What you choose for today will determine all of your tomorrows. Act accordingly!

Click here to return to the Seminars page.