But you have to be a disciplined investor to benefit....
The turmoil of the markets of early August were gut wrenching but not entirely unpredictable. After all market volatility is a fact of life in today's rapid fire electronic marketplace where the economic hiccups in one part of the world can become headaches in markets globally. If you have no need to liquidate or withdraw from your investments during a particularly topsy turvy market, the conventional wisdom is to simply wait out the storm. But if you have already set up an automatic investment purchasing program, such as through a direct debit from your chequing account to purchase mutual funds or a Group Registered Retirement Savings Plan (RRSP), you are well positioned to benefit from any market downturns through the magic of dollar-cost averaging.
Dollar-cost averaging simply means that over time, while you may pay more for an investment purchase one month, chances are you will pay less during another month, given the ups and downs of market volatility. Since most of us have neither the ability nor the nerves to sit in front of a trading screen all day to decide when to "buy low", the setting up of an automatic investment purchasing program, essentially a forced savings plan, ensures that pre-selected risk appropriate investment units or shares will bought on a pre-selected date at that day's market price without any further instruction from the client.
It is important to monitor your automatic purchases at least once a year to see if the investment selection still fits your risk profile and needs. If your finances are tight, you can opt out of most of these plans with due notice. But for those procrastinators (and we are numerous) who find making investment decisions painful, being in an automatic investment purchase program ensures that our savings will be invested come hell or high water- and with the way things are going, that is one less thing to worry about!
Showing posts with label investing. Show all posts
Showing posts with label investing. Show all posts
Friday, September 2, 2011
Tuesday, October 21, 2008
Fear and Loathing in the Markets strikes again...and again
Few people with any kind of financial interest in the markets are unaware of the current crisis, how it started and how various governments are trying to stabilize the situation and avert a freeze on global credit that would lead to a further meltdown in portfolio values.
No one knows how long this crisis is going to last( check out Warren Buffet's missive at http://www.nytimes.com/2008/10/17/opinion/17buffett.html) This appears to be always the case with seemingly "one of a kind" financial tornadoes that actually do pass thru our lives with surprising regularity every 5 or 10 years (i.e. 2001 aftermath of 9/11, the tech boom and bust of the late 90's, Black Monday in October of 1987) and so on.
So what does all this mean for you and for me? For anyone with money invested in securities,either registered or unregistered, the first question to ask oneself is "do I need this money now?" If yes, you have to weigh the cost of borrowing other funds to meet short term needs against the cost of crystallizing losses now if you convert your securities to cash. If you must sell stocks, consult a tax accountant before giving the sell order because the choice of whether to draw from a registered or unregistered account and which securities to sell may yet save you some taxes which will hopefully lessen the pain of your stock losses.
If you don't need the money and assuming you have it invested in the asset mix best suited for your risk profile, then leave it where it is for now. Avoid checking your portfolio obsessively- limit yourself to once a week or so. This will prevent you from rushing into action and give you time to reflect on how you will eventually re- balance your portfolio in order to restore your optimum asset mix.
This will likely be sometime after the U.S. Presidential elections and ideally at some quiet interlude in the financial storms so you can do an objective review of your holdings as you would ordinarily do when following a regular portfolio monitoring schedule.
Because in the end, you cannot predict nor control what the markets- and others are doing. You can only control your actions. So at least if you govern yourself according to your needs and your schedule, you will never have cause to regret a decision because you know it was the best decision you could make at the time.
No one knows how long this crisis is going to last( check out Warren Buffet's missive at http://www.nytimes.com/2008/10/17/opinion/17buffett.html) This appears to be always the case with seemingly "one of a kind" financial tornadoes that actually do pass thru our lives with surprising regularity every 5 or 10 years (i.e. 2001 aftermath of 9/11, the tech boom and bust of the late 90's, Black Monday in October of 1987) and so on.
So what does all this mean for you and for me? For anyone with money invested in securities,either registered or unregistered, the first question to ask oneself is "do I need this money now?" If yes, you have to weigh the cost of borrowing other funds to meet short term needs against the cost of crystallizing losses now if you convert your securities to cash. If you must sell stocks, consult a tax accountant before giving the sell order because the choice of whether to draw from a registered or unregistered account and which securities to sell may yet save you some taxes which will hopefully lessen the pain of your stock losses.
If you don't need the money and assuming you have it invested in the asset mix best suited for your risk profile, then leave it where it is for now. Avoid checking your portfolio obsessively- limit yourself to once a week or so. This will prevent you from rushing into action and give you time to reflect on how you will eventually re- balance your portfolio in order to restore your optimum asset mix.
This will likely be sometime after the U.S. Presidential elections and ideally at some quiet interlude in the financial storms so you can do an objective review of your holdings as you would ordinarily do when following a regular portfolio monitoring schedule.
Because in the end, you cannot predict nor control what the markets- and others are doing. You can only control your actions. So at least if you govern yourself according to your needs and your schedule, you will never have cause to regret a decision because you know it was the best decision you could make at the time.
Wednesday, September 26, 2007
So you have a little money to invest....
A few weeks ago, I got a great question from a young man who has a little money saved from his summer job and he was wondering what were his best options in investing this tidy sum (about $1500).
Now typically we see this kind of question posed to a mutual funds salesperson, broker or the "girl at the bank" and they immediately launch into what the "best" investment product is at that moment. By sheer co-incidence, the best investment is usually the one the "advisor" happens to be selling, either an exotically named global fund, a hot stock or a dressed up fancy but still plain old guaranteed investment certificate (GIC). ALL OF THIS ADVICE IS WRONG,WRONG, WRONG.
Why? Because none of them of asked what the money is to be used for. That is the first question you must ask yourself before proceeding with any investment plan. For example, if the money is to be used in the next 12-24 months, but you are not sure when, put the funds in a "no-load" (i.e. your bank's house brand which should not have a sales fee attached) T-bill mutual fund for safety of principal, market interest rates and ease of withdrawal. You can guarantee your rate of return by buying a GIC, but I would only suggest this if you knew exactly when you needed the money and could time the maturity of the GIC accordingly, otherwise it is cumbersome and can be costly to cash in a GIC before expiry.
But if you think you will only need the money in 3-5 years, say to help pay for university tuition, then you have a sufficient time horizon to invest in a "no-load" (again no sales fee) Canadian equity index mutual fund and be able to earn a greater rate of return (Ask about the Management Expense Ratio, MER, it should be less than 1% on an index fund). Your investment will go up and down over the next 60 months but resist the urge to buy and sell in response to the market. Establish a reasonable target return (say that the $1500 grows to $2000) and if you reach this target within the 6 months before you need the funds, sell your units and transfer the cash to a T-bill fund. Sure, maybe the Canadian index fund you sold will go up further, but you have made over 30% on the capital already and are you willing to risk losing on the $2000?
If you do not intend to use this money for many years, consider putting it in the same CDN equity index fund but in a registered retirement savings plan (RRSP). You may not need an RRSP deduction yet to get back income tax but you can save the deduction for a future year (when you have a lot more income) and your earnings will be tax sheltered until you are ready to withdraw the funds).
Lastly, if you want to learn more about investing and have some fun, you could try your hand at buying individual stocks. Start reading the business pages, read a few books (anything by Warren Buffet or his mentor, Benjamin Graham) and look up investment advice websites, (i.e. www.investorED.ca by the Ontario Securities Commission) in order to familiarize yourself with the basics of buying securities. Open your own discount brokerage account (shop around for the cheapest transaction fees you can find), buy a few stocks and see what they do. You may hit on a great buy or two but I promise you, you will lose money at some point. That's ok, because you will gain a wealth of hands-on knowledge about how the market really works and what your own risk tolerance really is. If you are truly interested in investing, there is nothing like experiencing this for yourself with a little money at a young age in order to save yourself a lot of grief later on with a lot of money at an older age.
So now that you know that the "best investment" is the one that best meets your need for safety of principal, liquidity and growth, not someone else's need for a commission. Don't fall for the latest "hot stock", make the right choice for you.
Now typically we see this kind of question posed to a mutual funds salesperson, broker or the "girl at the bank" and they immediately launch into what the "best" investment product is at that moment. By sheer co-incidence, the best investment is usually the one the "advisor" happens to be selling, either an exotically named global fund, a hot stock or a dressed up fancy but still plain old guaranteed investment certificate (GIC). ALL OF THIS ADVICE IS WRONG,WRONG, WRONG.
Why? Because none of them of asked what the money is to be used for. That is the first question you must ask yourself before proceeding with any investment plan. For example, if the money is to be used in the next 12-24 months, but you are not sure when, put the funds in a "no-load" (i.e. your bank's house brand which should not have a sales fee attached) T-bill mutual fund for safety of principal, market interest rates and ease of withdrawal. You can guarantee your rate of return by buying a GIC, but I would only suggest this if you knew exactly when you needed the money and could time the maturity of the GIC accordingly, otherwise it is cumbersome and can be costly to cash in a GIC before expiry.
But if you think you will only need the money in 3-5 years, say to help pay for university tuition, then you have a sufficient time horizon to invest in a "no-load" (again no sales fee) Canadian equity index mutual fund and be able to earn a greater rate of return (Ask about the Management Expense Ratio, MER, it should be less than 1% on an index fund). Your investment will go up and down over the next 60 months but resist the urge to buy and sell in response to the market. Establish a reasonable target return (say that the $1500 grows to $2000) and if you reach this target within the 6 months before you need the funds, sell your units and transfer the cash to a T-bill fund. Sure, maybe the Canadian index fund you sold will go up further, but you have made over 30% on the capital already and are you willing to risk losing on the $2000?
If you do not intend to use this money for many years, consider putting it in the same CDN equity index fund but in a registered retirement savings plan (RRSP). You may not need an RRSP deduction yet to get back income tax but you can save the deduction for a future year (when you have a lot more income) and your earnings will be tax sheltered until you are ready to withdraw the funds).
Lastly, if you want to learn more about investing and have some fun, you could try your hand at buying individual stocks. Start reading the business pages, read a few books (anything by Warren Buffet or his mentor, Benjamin Graham) and look up investment advice websites, (i.e. www.investorED.ca by the Ontario Securities Commission) in order to familiarize yourself with the basics of buying securities. Open your own discount brokerage account (shop around for the cheapest transaction fees you can find), buy a few stocks and see what they do. You may hit on a great buy or two but I promise you, you will lose money at some point. That's ok, because you will gain a wealth of hands-on knowledge about how the market really works and what your own risk tolerance really is. If you are truly interested in investing, there is nothing like experiencing this for yourself with a little money at a young age in order to save yourself a lot of grief later on with a lot of money at an older age.
So now that you know that the "best investment" is the one that best meets your need for safety of principal, liquidity and growth, not someone else's need for a commission. Don't fall for the latest "hot stock", make the right choice for you.
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