After my experience with a series of advisory firms that didn’t end up meeting my needs as an investor, I decided it was time to determine who I was and then pick an investment strategy to suit. I realized that I wanted to know exactly what I owned, and that I really disliked being unable to understand how well my investments were performing without an advanced degree in mathematics. It simply wasn’t good enough for me to “trust” my adviser when he or she said my portfolio was doing well. I really needed to be able to judge for myself. I also now knew enough about the world of mutual funds to be sure I didn’t want them in my RRSP or non-registered account.
Once I got going I realized a number of other things about myself:
1. I didn’t like a lot of buying, selling, and re-buying (i.e., “activity”) in my accounts.
2. I didn’t want to have to claim capital gains on our non-registered account unless there was a very compelling reason, because that meant paying tax on the gain.
3. I didn’t like stocks that were focused in niche markets like uranium processing, or companies with a single product to sell like coffee.
4. I didn’t want too much money invested in oil, gas, gold, potash, or other cyclical commodities. Yes, I could have made a bundle buying gold stocks back in 2005 or oil before it hit a hundred dollars a barrel, but I could just as easily have bought gold or oil at its peak and lost money. The problem is – and the research backs me up here – there is no way for the average person to know when gold or anything else is going to go up or down.
5. I wanted companies that produced a reliable dividend and increased it regularly.
6. I wanted a good percentage of my money in bonds or preferred shares that paid a guaranteed return.
7. I wanted the majority of my investments to be in larger companies with long track records.
8. I wanted rock-bottom fees. I was tired of paying fees for services I didn’t receive and expertise that turned out to be ... well, rather less than expert.
9. Above all I wanted my investments to be understandable, so I could easily see how my portfolio was doing without getting a headache. KISS!
This makes me seem like such a dull investor. But better dull than desperate! Here’s why these things make sense for my husband and me:
• We work for ourselves, so we are more vulnerable than many employees to economic downturns.
• We have no company pension or health plan.
• We take a lot of risks with work and don’t need to take more with our money.
• We have a child with a disability and want to be able to help her out if need be.
I came to understand my investment priorities after a period of questioning brought about by dissatisfaction with the way I had allowed my money to be handled. Hard to do at the beginning – especially if you don’t have much experience with investments. If you don’t know a dividend from a commodity, then how do you decide what you want and what you don’t want? The answer is simple: focus on what you do know about yourself. To understand who you are as an investor, you need to think about three main areas: time frame, situation, and risk tolerance (or temperament).
What’s Your Time Frame?
Time frame is the easiest aspect of your investor profile to figure out. The bottom line is this: the shorter your time frame – or the sooner you need all or part of your money – the more you need to protect it. This is usually called capital preservation. And the best way to preserve what you’ve got is to choose investments that don’t present a lot of risk.
What does risk have to do with time frame? Let’s just say you were investing 100 per cent in equities, which are riskier than most bonds. Let’s assume your investments were worth $250,000 in early 2007 but dropped in value to $150,000 after the market crash of 2008 – a typical scenario.
If your reduced portfolio earned 5 per cent annually from that point on, it would take nearly 11 years to get back to where you started assuming a modest inflation rate of 1 per cent. If you don’t have those years, you should ensure that your money isn’t too heavily invested in the stock market. Ask yourself that one simple question: When will I need the money?
What’s Your Situation?
Situation refers to where you are financially at a given moment and where you expect to be in the future. Someone just starting out as an investor has different needs and a different relationship to risk than someone who is retired on a pension. But that doesn’t mean a person just starting out should load up on risk and a retiree should stick with GICs. It all depends on your situation.
How Much Risk Can You Tolerate? Or, What’s Your Investment Temperament?
How much risk can you stomach? This is incredibly tough to figure out. I know, for example, that I am okay on the Ferris wheel but would lose my lunch on the Zipper. My husband isn’t okay with either.
Now, if you’ve never even been to a fairground, you’d have difficulty deciding which of the rides would suit you. That’s how it is with investment risk tolerance too. Risk is all about the chance of losing money – or at least your portfolio losing value – and if you’ve never had the experience, how do you know how much risk you can tolerate? I’ve seen very conservative types shrug their shoulders and say, “Oh, well,” when the market tanked, taking a good chunk of their savings along with it. And I’ve also seen market pros, men and women who live on the edge, become physically ill when they lost money in 2000 and 2008.
This is an edited excerpt from Count on Yourself: Take Charge of Your Money by Alison Griffiths. Copyright © 2012 by Alison Griffiths. Reprinted by permission of Simon & Schuster, Inc.