Source: Investments Illustrated Inc.
Wednesday, 26 August 2015
Wednesday, 29 July 2015
Measuring the Value of Advice
How can you
measure the value of advice?
It’s
one of the harder things in life to put a dollar figure on. Most of us seek it
in one form or another before making any important decisions. So why wouldn’t
you consult an advisor before planning retirement, saving for your children’s
education or making major purchases?
Some claim they
can do it on their own, though rarely take into account the value of their own
time. An advisor’s job is to know the industry and the products inside out, and
how to strategically use these products in a custom tailored plan unique to every client.
In addition to
retirement planning, your advisor will take under consideration tax strategies,
insurance needs and risk management to form a plan that reflects your personal
goals and ambitions. They will offer ongoing advice and hold periodic plan reviews at your
convenience to ensure that you remain on course.
While you
cannot foresee every hiccup in the road, you can certainly be prepared. Rest easier
knowing your advisor will be with you every
step of the way.
Tuesday, 14 April 2015
Friday, 15 August 2014
Understanding Risk in an Uncertain World
Risk can take on many forms and is
ubiquitous in daily life. Risk can range from skydiving to forgetting to bring
home flowers on Valentine’s Day. Risk can mean taking a shortcut to get to your
meeting to starting up your own business.
With regards to investing, risk is ‘the
chance that an investment will lose its value.’ In prospectuses provided by
fund companies, there are generally more than 25 types of risks listed. Several
forms of risk can play a more significant role in your portfolio than others. Some
of these include:
Market
risk: This type of risk is associated with similar investments
that lose value due to broad issues within the market or during various stages
of the business cycle. It may be difficult to drown out the ‘bull’… and ‘bear’
market noise but downturns are expected in the general upward trend line of the
market.
Credit
risk: The ability of a company to pay back its
debts is measured by its credit risk. Higher yields are paid to attract
investors to companies that have a higher risk of defaulting on its bonds and debt
obligations.
Geopolitical
risk: Wars, political instability and similar headline
news all have a strong effect on the markets as conflict is a hindrance to robust
economic growth. Currency risk can be coupled with geopolitical uncertainty as
the demand for a country’s money can decrease when the political, economic and social environments
become unfriendly to investment.
Interest
rate risk: Interest rates have a significant impact
on fixed income securities. As a general rule, a rise in interest rates leads
to a decline in the value of bonds and vice-versa. In addition, highly
leveraged companies and governments are vulnerable to higher interest rates as
the interest expenses paid on large amounts of debt becomes increasingly
difficult.
Inflation
rate risk: Fiat money (currency not backed by a
commodity but rather government regulation) is subject to inflation. An
increase in money supply leads to inflation and erodes purchasing power of a
currency. Inflation should be subtracted from the nominal return on an investment
to get the real return.
Longevity
risk: The chance of outliving one’s money is one of
the most important issues to address when planning for retirement. Calculating
how much an individual needs to save for retirement requires weighing factors
such as life expectancy, income needs, saving rates and whether a sizeable
estate will be passed onto heirs.
While high-risk investments have the
potential for large gains, they carry the potential for greater loss. Likewise,
taking little to no risk offers no meaningful return. The way to mitigate
against the myriad of risks in the marketplace is to maintain a well
diversified portfolio. This tried and tested manner of investing is the best
way over the long term to reach the best risk-adjusted returns.
Wednesday, 18 June 2014
Monday, 26 May 2014
Tuesday, 20 May 2014
Patience is a Virtue… and Profitable
The importance of human behavior and
patience in determining investment success
Long-term investing is making prudent buying decisions of
low priced, solid investments that are to be held for an extended period of
time. To realize the full return of these investments, you must hold to a set
of principles and behaviors to counter human reactions common in the
marketplace. This requires a great deal of patience. Overcoming psychological roadblocks
which affect investing decisions means you must confront your biggest enemy: yourself.
Holding to a solid set of
principles can prove more valuable than technical knowledge. Here are some of
them:
1) Avoid frequently reading share prices.
Glancing
at daily price movements adds no value to your portfolio, as it may entice you
to sell or buy on a whim. It is better to look at quarterly and better yet,
yearly returns. It is important to be aware but not consumed by the economic
environment—cycle swings are inevitable but have a limited effect on long-term
portfolio performance.
2) Intrinsic
value should be the decisive factor when making investment decisions.
‘Price
is what you pay. Value is what you get.’—Benjamin Graham. Buying low cost,
under priced stocks and mutual funds is a much more sure way of realizing your
investment and retirement goals. Prices reflect the current opinions of what
others think the stock or mutual fund is worth. These constant changes of opinion
should not affect the long-term value of the holding.
3) Buy
a fixed dollar amount of stocks over time regardless of price.
This is
known as ‘dollar cost averaging’ which lessens the risk of investing a large
amount of money into a stock or fund at the wrong time. The price per unit or
share will eventually become smaller and smaller over time, buying more shares
when they are low and less shares when they are high.
4) Short-term
thinking should never trump long-term goals.
Market
volatility is a short-term phenomenon. With a properly diversified portfolio
based on solid funds, long-term investing provides significantly less risk.
By taking a disciplined approach toward your investments, the
urge to buy or sell on a whim begins to dissipate, avoiding human tendencies of
both panic and greed. Sticking to solid values not only allows for your
investment and retirement goals to be more likely realized but also allows for a
peace of mind—something that is hard to come by in the investment process.
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