Dear Nancy Woods,
I have been approached by my bank to invest the $150,000+ that is sitting in my bank account gaining little-to-no interest. It is basically losing money after inflation and taxes. I have had experiences with mutual funds and they did not serve me well. I know there are other types of investments but I have not had much experience other than GICs and a few mutual funds. How do I know what style is right and who can help me implement it?
Choosing an investment style is like choosing a pair of shoes. You need to decide a colour, function, price and comfort level. For investment style, you need to decide whether you want active-managed or passive, what your portfolio objectives are, whether you need some income, only income, some growth, preserve capital etc. You have to decide whether you are going to do it yourself and monitor things or have a fund manager or an investment adviser do it. And finally, you have to choose what will make sure you sleep at night.
In my own practice I often use the sleep factor to measure an investor’s risk tolerance. My preference is to know what you own and why. It helps one weather the volatility in the markets. If you know that you own quality stocks then a weakness in market price should be considered inconsequential.
As for investment styles, you can invest in a single method or a combination of the following:
- individual stocks (that you select or an investment adviser recommends to you)
- managed account (where your portfolio is managed by an investment company or in-house team to buy and sell the holdings according to an investment policy statement that you set up)
- mutual funds (that are typically actively-managed and part of a pool of investors' monies)
- hedge funds (that are actively-managed by a professional management firm who can use a wide variety of investment styles and instruments)
- structured products (that are instruments that may or may not have a protection for the principal and have gain typically from an underlying derivative)
- fund of funds (that may or may not be actively-managed and rebalanced)
- exchange-traded funds (following indexes or specific sectors. These typically are not frequently traded)
- various fixed-income products (like bonds, stripped coupons, savings bonds, GICs)
Firstly, I would recommend that you have a professional financial plan or analysis done so you can get an unbiased opinion as to what is a reasonable return required and what to expect to receive.
If you have a pension for example, I often factor that into the analysis as part of the fixed-income component. Frequently, people forget that having the guaranteed regular income from a pension is the same has having a large bond in the bank. This is important when calculating the asset mix. You may have a 50-per-cent fixed-income component in your portfolio but when you add in a pension, if it is sizable, it may increase your fixed income-portion to 70 per cent, which may not be appropriate.
Having knowledge and possibly experience with all investment style types to some degree may help you make the decision as to what works best for you. You probably won’t know until you try it. Do your research, talk to experienced people, interview advisers. Choosing an investment style is a very personal thing and should not be done lightly.
Nancy Woods is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. Visit her website www.nancywoods.com or send an email request to firstname.lastname@example.org. You can send your questions to email@example.com as well.
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