Archive for the 'Principles For Long Term Investing' Category

05
Mar

Income and growth: Two sides to your portfolio

By Shamsh Moosa 0 Comments
Categories: Principles For Long Term Investing

Your investments can provide returns in the form of either income or capital growth. The decision to opt for one source of return over the other normally stems from your tax position, your immediate requirements for cash and your long-term plans. Here are some of the unique risks and rewards associated with investing for income and capital growth.

 

Regular income can provide stability

There are two primary ways to earn income: lend your funds to a borrower in return for interest and the eventual repayment of your principal, or own shares that produce dividends. The first type of security is often referred to as “fixed income” and includes bonds, debentures and mortgage-backed securities. The second type of income is derived through ownership of common and preferred shares and income trust units that distribute company profits in the form of dividends. With income investments, there are income tax consequences to bear in mind, as well as two types of risk. The first is interest rate risk. Once you are locked into a rate of interest for a certain term, you risk the chance that market rates might rise and the rate you are earning may no longer be competitive. The longer the term of your investment, the greater the interest rate risk. The second is credit risk - the possibility that your principal will not be repaid or that the issuer will default on interest or dividend payments. This risk can be minimized by investing in high quality instruments from secure issuers, such as the Government of Canada.

 

Growth can build wealth

Investing for capital growth is vital not only to build wealth, but to protect your capital from taxes and inflation. The most popular growth investment is common stock. Investors purchase shares in a corporation and become part owners of the company. As the company grows, profits are reinvested in the company, which can cause the shares to increase in value. There are two primary risks to consider with common shares. The first is market risk. The market price of your investment will tend to fluctuate with the stock market as a whole, even if there have been no material changes in the company whose shares you own. The second type of risk is specific to the company itself. If your investment portfolio consists only of stocks that are dependent on the petroleum industry, for example, any decline in oil prices will affect the value of your entire portfolio.

 

All of the above risks can be minimized by diversifying your investment dollars among income and growth, and among a number of different securities and even a variety of markets around the world.

03
Feb

First the plan, then the portfolio

By Shamsh Moosa 0 Comments
Categories: Principles For Long Term Investing

A portfolio is part of a financial plan, not the other way around.

I talk to a variety of people during the week—clients, potential clients, friends and family.  Most (if not all) of these people have investment portfolios.  But with the exception of my clients, very few of them have financial plans.

There’s a big difference between a portfolio and a plan.  A portfolio is a collection of investments, gathered together in an account with little regard for long-term strategy.  A plan, on the other hand, is all about strategy.  It is a detailed roadmap for achieving financial goals within a given time frame.  In this way, an investment portfolio serves the financial plan.  Not the other way around.

Quite frankly, I see too many people make investment decisions in a vacuum—without looking at the “big picture.”  What are you trying to accomplish?  What’s the end goal of investing in XYZ stock?  Too often these questions are ignored, and a stock is bought simply because its share price seems to be going up.  The result is a hodge-podge of investments that performs poorly, and often forces the investor to take on a lot more risk than is necessary.  That can leave the investor frustrated and anxious at the inability to attain financial goals.  Which can lead to riskier and riskier investments.  And so the cycle continues.

It doesn’t have to be this way.  If you have an investment portfolio, that’s a good start.  But you need a financial plan as well.  Here are three things a financial plan can do for you.

Fills in the big picture
A financial plan gives you a rationale that you can apply to investment decisions. For example, if you’re faced with an investment opportunity, and you don’t know whether you should take it or not, simply review your financial plan and ask yourself:  “does this investment bring me closer to my goals?  Does this investment fit into the big picture?  Does it fit in with my stated risk tolerance?”  If you can answer yes to all three, then the investment is worth considering.  If not, you move on.

Offers discipline
A financial plan strengthens your commitment to financial goals.  It encourages you to take profits and to accept losses when it makes sense to do so.  It serves as a “reality check” when you hear hot tips, and prevents you from overconcentrating the portfolio in a single stock or market sector.  This alone can do a lot to protect your financial future.

Offers peace of mind
A financial plan helps you sleep at night.  When you know where you’re going (and why you’re taking a particular route to get there), you feel more confident about the future.  A well-written financial plan takes market volatility into account, and can provide you with direction in good markets and bad—that can be very valuable in times of volatility.  But it’s not just about the market.  Life can be uncertain too.  A financial plan can account for unexpected circumstances in your life—if you become disabled, for example.  You’ll sleep better because you’ll know that no matter what happens, your plan is working to achieve your long-term goals.

Contrary to popular belief, writing a financial plan doesn’t have to be difficult.  All it takes is a little commitment.  And when you see others who don’t have a plan anxious and stressed about not meeting their financial goals, you’ll understand just how valuable a financial plan can be.

03
Feb

How to be a conservative investor

By Shamsh Moosa 0 Comments
Categories: Principles For Long Term Investing

The hallmarks of the conservative investment approach

The other week I was talking to an acquaintance of mine about the difference between a conservative investor and an aggressive investor.

Great question.  An important question too.  Because in my experience, too many people out there are too aggressive with their portfolios.  They take on more risk than they have to, and other than sleepless nights, they have very little to show for it.  These people would be far better taking a more conservative approach to their wealth, slowly building their wealth over time, rather than looking for the “big score.”

With that in mind, allow me to provide you with some of the guiding principles that go behind the conservative investment approach that I take with my clients.  Hopefully, these points will convince you that you should be a conservative investor too.

Think risk first
The most important part of being a conservative investor is to think risk first.  To the conservative investor, protecting wealth comes first, and building wealth comes second.  The conservative investor always knows how much risk he or she is willing to accept to achieve his or her investment goals.  And the conservative investor never takes on more risk than is needed to accomplish those goals.  This is an important principle that a lot of investors get wrong.

Be cautious with projections and assumptions
Investing isn’t an exact science.  When creating a financial plan, there’s a whole bunch of projections and assumptions that have to be made (about what will happen to the market over the next five to ten years, for example, or to inflation).  Even though we don’t know for sure what the future will hold, we have to go ahead and assume.  The conservative investor will err on the side of caution with these assumptions, and will base projections on historical averages (or perhaps a little lower).  This approach allows for some “wiggle room” in the financial plan, and ensures the overall plan remains intact no matter what happens in the market.

Diversify, diversify, diversify
Betting big on a single stock (or a single market sector) may be fine for gamblers and day-traders but not for the conservative investor.  The conservative investor always takes the time to work out a personal asset allocation strategy, and diversifies the portfolio across a variety of assets, economic sectors, and geographic markets.  That way, if something goes wrong in one part of the portfolio, it won’t result in a financial disaster.

Review and modify
Even the most well constructed portfolio needs to be reviewed and modified once in awhile.  That’s why the conservative investor pays attention to company fundamentals on an ongoing basis, and keeps up-to-date with economic events.  If a change needs to be made (in order to bring the portfolio back in line with the investor’s risk tolerance, for example) the conservative investor will make the change.  In this way, the conservative investor minimizes the risk of holding on to losing positions.

Work with a professional
Finally, the conservative investor understands the value of professional advice.  No matter how experienced the conservative investor is when it comes to investing, he or she knows that a second opinion is necessary. By working as a team with their Investment Executives, conservative investors keep their portfolios strong.

I admit the conservative investment approach isn’t the only way to make money with your investments. However, in my experience, it’s the approach that works best for most people.  Keep it conservative; keep it simple, and think about protecting your wealth rather than playing “stock market roulette.”  That’s the strategy that can help you achieve your financial goals, without undue risk.

03
Feb

6 Principles For Long Term Investing

By Shamsh Moosa 0 Comments
Categories: Principles For Long Term Investing

1. Have a plan and stick to it
Successful investing requires a game plan that outlines your goals and objectives and ensures you are on the right track when making decisions. This plan will prevent you from taking on more risk than you should when markets are rising and will help you make appropriate decisions when the world appears to be falling apart. Your goals may be a successful retirement, education for children, paying down a mortgage or buying a second home. Your risk profile can be related to your time frame, present wealth or the consequences of not achieving your goals. While you are the best judge of these objectives and your tolerance for risk, I can help you formalize these goals into a customized plan.

2. Be diversified and balanced
With a balanced portfolio that includes stocks, bonds and cash, an investor can reap the benefits each of these different assets offers. Stocks offer growth and inflation protection, bonds offer income and stability, and cash offers insurance for future opportunities. Diversification can both improve return and reduce risk in an investment portfolio. By including a variety of different industries and companies, you can offset weaknesses in some areas with strengths in others. Similarly, investing internationally can expose an investor to many different business cycles, so weakness in one region can be balanced by strength in others.

3. Think long term
Evidence shows that trying to time the market just doesn’t work. Instead, I encourage you to focus on longer-term trends, not temporary fluctuations. Statistics show that, on average, the longer investors hold equities, the better their chances of earning a positive return. With time on your side, an investment portfolio can benefit from the many more positive years capital markets have experienced versus the occasional, albeit sometimes severe, down years.

4. Buy and retain quality

The best way to avoid a disaster is to focus on quality. Financial stability and strength as measured by low and manageable debt levels; a stable history of profit and dividend growth; and a strong management team capable of executing a strategic plan for growth are some of the factors that can determine quality. However, corporations and industries change, and so does their quality. Therefore, it is important to regularly compare your holdings against a quality checklist and make changes where appropriate.

5. Stick with the winners; eliminate the losers
Investors want to believe they’ve picked winners. Even when they’ve made investment mistakes, they may hold onto poor performers hoping for a turnaround. So often we sell our winners and pat ourselves on the back while we keep our losers. The ultimate result: a losing portfolio backed by a lot of hoping. Having a disciplined approach to investing, taking losses early and letting profits run on your winners can lead to better and more consistent returns.

6. Review, reassess, rebalance
Having made a plan and put it into effect, an investor can’t just forget about it. Monitoring your plan and regularly reviewing your portfolio are as important as creating and implementing the plan itself. Capital markets change. Your own objectives and risk profile may change with wealth and age. By monitoring where you are relative to your plan or in terms of capital markets, you can make the necessary adjustments to ensure you are headed in the direction right for you. This process of planning, reviewing and rebalancing will ultimately ensure financial success.

The best plan of action is to make sure you have a solid plan. Please contact me today to review your personal portfolio.

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